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AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
1
AS MERKO EHITUS GROUP
2016 3 months
consolidated unaudited interim report
Business name: AS Merko Ehitus
Main activities: Holding companies
General contracting of construction
Real estate development
Commercial Register No.: 11520257
Address: Järvevana tee 9G, 11314 Tallinn
Postal address: Pärnu mnt 141, 11314 Tallinn
Phone: +372 650 1250
Fax: +372 650 1251
E-mail: [email protected]
Web site: group.merko.ee
Financial year: 01.01.2016 – 31.12.2016
Reporting period: 01.01.2016 – 31.03.2016
Supervisory Board: Toomas Annus, Teet Roopalu,
Indrek Neivelt, Olari Taal
Management Board: Andres Trink, Tõnu Toomik
Auditor: AS PricewaterhouseCoopers
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
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TABLE OF CONTENTS
BRIEF OVERVIEW OF THE GROUP ........................................................................................................................................................................................................ 3 MANAGEMENT REPORT ......................................................................................................................................................................................................................... 5 MANAGEMENT BOARD'S DECLARATION TO THE MANAGEMENT REPORT ....................................................................................................................... 34 CONSOLIDATED FINANCIAL STATEMENT ...................................................................................................................................................................................... 35
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ............................................................................................................................................. 35 CONSOLIDATED STATEMENT OF FINANCIAL POSITION ....................................................................................................................................................... 36 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ......................................................................................................................................................... 37 CONSOLIDATED CASH FLOW STATEMENT ............................................................................................................................................................................... 38
NOTES ....................................................................................................................................................................................................................................................... 39 NOTE 1 ACCOUNTING POLICIES USED ...................................................................................................................................................................................... 39 NOTE 2 OPERATING SEGMENTS ............................................................................................................................................................................................... 39 NOTE 3 COST OF GOODS SOLD .................................................................................................................................................................................................. 42 NOTE 4 EARNINGS AND DIVIDENDS PER SHARE ................................................................................................................................................................. 43 NOTE 5 CASH AND CASH EQUIVALENTS ................................................................................................................................................................................. 43 NOTE 6 TRADE AND OTHER RECEIVABLES ............................................................................................................................................................................ 44 NOTE 7 INVENTORIES ................................................................................................................................................................................................................... 44 NOTE 8 LONG-TERM FINANCIAL ASSETS .............................................................................................................................................................................. 45 NOTE 9 INVESTMENT PROPERTY ............................................................................................................................................................................................. 45 NOTE 10 PROPERTY, PLANT AND EQUIPMENT .................................................................................................................................................................... 45 NOTE 11 INTANGIBLE ASSETS .................................................................................................................................................................................................... 46 NOTE 12 BORROWINGS ................................................................................................................................................................................................................ 46 NOTE 13 PAYABLES AND PREPAYMENTS .............................................................................................................................................................................. 47 NOTE 14 SHORT-TERM PROVISIONS ....................................................................................................................................................................................... 47 NOTE 15 OTHER LONG-TERM PAYABLES ............................................................................................................................................................................... 47 NOTE 16 RELATED PARTY TRANSACTIONS ........................................................................................................................................................................... 48 NOTE 17 CONTINGENT LIABILITIES ............................................................................................................................................................................................ 52
MANAGEMENT BOARD'S CONFIRMATION TO THE CONSOLIDATED INTERIM REPORT .................................................................................................. 53
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
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BRIEF OVERVIEW OF THE GROUP
Merko Ehitus is active in offering general contracting services in the field of construction and in residential real estate
development and on providing complete solutions in professional construction and real estate development in its home markets
Estonia, Latvia and Lithuania. In Q1 2016, the group launched operations in Norway as well. Long-term experience in various
countries, a wide scope of construction services, flexibility, reliability and meeting the deadlines and primarily quality have helped
group companies to achieve a strong position in the Baltics. Depending on the requirements of the contracting entities, the group
companies perform both large scale, complicated and innovative projects as well as small-scale construction works, with a focus
on general contracting and project management. Merko Ehitus is among the leading residential construction companies in the
Baltic states.
Holding company AS Merko Ehitus is responsible for the development and implementation of the strategies of various group
companies primarily through allocation and long-term planning of resources. The shares of Merko have been listed on the NASDAQ
Tallinn Stock Exchange since 1997. The group employs 782 people.
The group comprises construction and property development companies providing complete construction solutions in Estonia,
Latvia and Lithuania, among which the group’s largest construction sector companies are AS Merko Ehitus Eesti (100%), SIA Merks
(100%), UAB Merko Statyba (100%) and the companies belonging to the AS Merko Ehitus Eesti group: Tallinna Teede AS (100%) and
AS Merko Infra (100%).
Merko Ehitus is the company with the highest owners' equity in the Estonian construction sector and is able to finance projects by
itself in long-term. We are conservative in involving debt capital. We ensure that we would have sufficient necessary resources for
continuously investing in attractive projects.
Merko Ehitus Eesti group is the market leader of the Estonian construction sector with approximately 4% of the total volume of
the Estonian construction market as of the end of 2015. In Latvia and Lithuania, Merko Ehitus operates through its subsidiaries SIA
Merks and UAB Merko Statyba focusing selectively on projects where the competitive advantage is perceivable as compared to
other market players.
International quality, environmental protection and occupational safety certificates ISO 9001, ISO 14001 and OHSAS 18001 have
been assigned to the group’s larger construction companies.
THE NORTH ESTONIAN MEDICAL CENTRE HIGH TECH C-BLOCK, HOUSING AMONG OTHERS THE DAY SURGERY OPERATING UNIT,
ESTONIA’S LARGEST HOSPITAL BLOOD BANK, CARDIOLOGY CENTRE, LABORATOY AND POYCLINICS WAS OPENED IN MARCH 2016.
THE FIRST STAGE OF THE BLOCK, WITH TOTAL GROSS AREA OF APPROXIMATELY 28,000 M², WAS COMPLETED IN AUGUST 2014
AND THE SECOND STAGE IN MARCH 2016.
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
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VISION Our vision is reliable solutions and quality performance for your ideas.
VALUES RESPONSIBILITY
We decide based on business thinking, awareness and ethical beliefs. We offer enduring and
environmentally friendly solutions.
KEEPING PROMISES
We give realistic promises to the shareholders, contracting entities, cooperation partners,
employees and we keep our promises. Good solutions are born in cooperation, the keeping of one's
promises is mutual.
COMPETENCE We value quality and professionalism. We constantly develop our professional knowledge and
skills.
INITIATIVE We manage processes and we are result-oriented. We accept the challenges which presume more.
CREATIVITY We are open, innovative and creative in working out and implementing the solutions. We have a will
to carry out forward-looking ideas.
STRATEGY The business strategy of AS Merko Ehitus subsidiaries is focussed on improving profitability and enhancing the efficiency of the
cost base, offering general contracting services in the field of construction of buildings and infrastructure facilities and developing
residential real estate in its main home markets Estonia, Latvia and Lithuania. AS Merko Ehitus aims to be a preferred partner to its
clients for construction works.
LONG-TERM FINANCIAL OBJECTIVES UNTIL 2018 The Management Board and Supervisory Board have approved the company's strategic development directions and long-term
financial objectives for the period 2013 to 2018, which are:
average return on equity of the period 2013-2018 of at least
10%
dividend rate
50-70% of annual profit
equity ratio at least
40%
Considering the weak growth prospects of the Baltic construction and real estate market in the coming few years, the overall low
interest rate environment, as well as the company's high equity base, the strategy and financial objectives are focused towards
improving return on invested capital and on increasing the efficiency of the balance sheet.
FULFILLMENT OF LONG-TERM FINANCIAL OBJECTIVES 2013-2015
2015 2014 2013 AVERAGE
Return on equity, ROE (on yearly basis) 8.0% 10.1% 8.8% 9.0%
Dividend rate 90% 58% 70% 73%
Equity ratio 31.12 59.5% 51.0% 50.9% 53.8%
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MANAGEMENT REPORT
COMMENTARY OF THE CHAIRMAN OF THE MANAGEMENT BOARD
Merko Ehitus posted revenue of EUR 46.8 million in Q1 2016, EBIDTA of EUR 1.2 million and profits before taxes of EUR 0.3 million.
Merko continues to focus on private sector customers and real estate development, and the share of revenue from the latter
increased to 42% of the group’s total Q1 revenue. Merko sold 101 apartments in the first quarter compared to 62 in the same period
last year.
Due to the recent developments on the Baltic construction market, the management of the group is not satisfied with the results
of the first quarter. Civil engineering construction volumes are in a slump, which has affected profitability, and the volume of
government orders in general is down. While at the end of 2014, government contracts made up close to half of the Merko
portfolio, today the figure is only 20%. The first quarter results were also impacted by the slower than planned launch of
construction of several large-scale projects, due to changes in project design solutions and delays in getting approvals.
According to the management the goal continues to be to strengthen the group’s positions on the general contracting and
residential real estate market in Latvia and Lithuania, where similarly to Estonia, there are currently few public sector orders and
the realisation of private sector commercial real estate projects takes a long time. In the first quarter, we acquired a majority
holding in a Norwegian construction company with the objective to form the basis for the operations in the Norwegian
construction market. Merko has continued investing into real estate development as planned and the apartment sales results are
satisfactory in all three Baltic capitals. The management hopes that similarly to Vilnius and Tallinn, the Riga apartment market will
also become active, as there has recently clearly been an undersupply of new apartments in the biggest city in the Baltics. For the
first time, sales revenue in the real estate segment made up over 40% of the group’s total revenue, which includes the sale of
strategically non-core immovable properties for the group. In apartment development, the group will continue investing into
quality product development and construction.
In Q1, Merko sold 101 apartments with a total price of EUR 11.4 million
(not including VAT), compared to the 62 apartments sold in the first
three months of 2015. In the first quarter, Merko launched construction
of the second Paepargi high-rise in Tallinn and the last apartment
building in the Kaupmehe project in Tartu. The group will continue
investing into residential real estate projects and similarly to last year,
plans to start construction of more than 500 new apartments in 2016.
Merko Ehitus posted revenue of EUR 46.8 million in Q1 2016, which includes sale of non-strategic immovable properties. Q1 EBITDA
was EUR 1.2 million, profit before taxes was EUR 0.3 million and the net profit was EUR 0.1 million.
In Q1 2016, the group’s companies entered into new contracts totalling EUR 22.4 million, including the BAUHAUS department store
in Rocca al Mare and Tallink tennis centre. As at 31 March 2016, the group had a secured order book balance of EUR 243.5 million.
Major projects in progress in Tallinn for Merko in Q1 included the construction of Hilton Tallinn Park Hotel, the design and
construction of Maakri Quarter, Öpiku Building, T1 shopping centre and the design and construction of a tram line that will serve
the airport. In Latvia and Lithuania, the largest projects in progress are the Riga Airport passenger terminal, the Kauno/Algirdo
residential and commercial quarter and the Narbuto 5 office building.
3 MONTHS 2016
PROFIT BEFORE TAX 0.3 MILLION EUROS
REVENUE 47 MILLION EUROS
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OVERVIEW OF THE 3 MONTHS AND IV QUARTER RESULTS
PROFITABILITY
Profit before tax in 3M 2016 was EUR 0.3 million (3M 2015: EUR 0.8 million), which is equivalent to a profit before tax margin of
0.6% (3M 2015: 1.8%). Gross margin in 3M was 6.5% (3M 2015: 7.8%). Net margin in 3M 2016 decreased to 0.2% (3M 2015: 1.8%) and
net profit was EUR 0.1 million (3M 2015: EUR 0.8 million), having decreased by 86.2% compared to the same period last year.
REVENUE
Revenue in 3M 2016 was EUR 46.8 million (3M 2015: EUR 45.6 million), which has increased by 2.7% compared to last year. The
share of revenue earned outside Estonia has decreased in 3M 2016 to 33% (3M 2015: 42%) and the share of revenue earned in
Estonia has accordingly increased to 67% (3M 2015: 58%). The number of apartments (101 units) sold in 3 months of 2016 has
increased by 62.9% and the revenue from apartment sales (EUR 11.4 million) by 5.4% (3 months of 2015: 62 units, revenues of EUR
10.8 million).
CASH POSITION
At the end of the reporting period, the group had EUR 34.4 million in cash and cash equivalents and equity EUR 125.8 million (62.3%
of total assets). Comparable figures as at 31 March 2015 were accordingly EUR 40.9 million and EUR 127.8 million (53.1% of total
assets). As at 31 March 2016 the group had net debt of negative EUR 8.2 million (31 March 2015: negative EUR 5.8 million).
SECURED ORDER BOOK
In Q1 2016, group companies signed new contracts in the amount of EUR 22.4 million (Q1 2015: EUR 22.4 million). As at 31 December
2016, the group’s secured order book stood at EUR 243.5 million (31 March 2015: EUR 167.2 million).
DISTRIBUTION OF PROFITS
The general meeting of shareholders held on 27 April 2016 resolved to approve the profit allocation proposal for 2015 and to
distribute EUR 9.0 million (EUR 0.51 per share) in dividends from retained earnings. This is equivalent to a 90% dividend rate for
2015.
3M 2016 3M 2015 VARIANCE 12M 2015
Revenue million EUR 46.8 45.6 +2.7% 251.0
Gross profit million EUR 3.1 3.6 -14.0% 23.0
Gross profit margin % 6.5 7.8 -16.3% 9.1
EBITDA million EUR 1.2 1.9 -36.6% 15.5
EBITDA margin % 2.5 4.1 -38.3% 6.2
Profit before tax million EUR 0.3 0.8 -63.7% 11.7
PBT margin % 0.6 1.8 -64.7% 4.7
Net profit (parent) million EUR 0.1 0.8 -86.2% 10.0
Net profit margin % 0.2 1.8 -86.6% 4.0
EPS EUR 0.01 0.05 -86.2% 0.56
31.03.2016 31.03.2015 VARIANCE 31.12.2015
ROE (on yearly basis) % 7.5 10.1 -25.5% 8.0
Equity ratio % 62.3 53.1 +17.3% 59.5
Secured order book million EUR 243.5 167.2 +45.6% 246.9
Total assets million EUR 202.0 240.8 -16.1% 211.1
Number of employees people 782 776 +0.8% 791
Ratio definitions are provided on page 33 of the report.
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
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THE MAIN FACTORS INFLUENCING THE CONSTRUCTION MARKET
IN THE 3 MONTHS OF 2016
CONSTRUCTION SERVICES
In 2016, we forecast that in the Baltics as a whole, volumes of construction orders will continue to be at a low, while the housing
construction market is set to remain relatively active. The year 2015 was a year of stabilisation in the volume of construction
orders of general contractors in the Baltic States. As indicated in the reports of previous periods, this can mainly be attributed to
the decrease in EU-funded public procurements, especially with regard to civil engineering work. The outlook on the construction
market has also been impacted by the overall slump in investor confidence, a large number of completed projects or construction-
in-progress (e.g. office buildings in Tallinn), as well as the often insufficient equity. On the other hand the construction market
volume as a whole has been supported by a relatively more active residential construction, especially in Tallinn and Vilnius, which
partly offsets the decline in public investment in infrastructure, but doesn’t mean significantly more work for general contractors,
whose developments often compete in this field with their potential customers. From the point of view of the development of the
construction sector in the near term, it is paramount to start preparing for construction projects being financed as part of the EU
financial framework period and the call for tenders by the government. The current EU budgetary period measures, through which
funds will be allocated, are opening gradually – expectations that procurements will become more active in 2015 did not
materialise. As new projects require thorough preparation, we estimate that the number of new public procurements will start
gradually growing from the second half of 2016. We therefore forecast EU-funded public works procurements to be launched from
2017 onwards.
Due to the decrease of public sector orders it is a group priority for all three Baltic countries to cooperate with private customers,
to whom we wish to offer comprehensive design and construction services, quality and optimal construction solutions, effective
construction process and certainty regarding timely completion of projects. The total number of projects launched and planned by
private sector clients has grown somewhat in 2015, yet we do not anticipate continued growth but rather a stabilisation in the
volume of private orders. It is important for the state to resume its orders so as to avoid huge fluctuations on the construction
market.
An overall decrease in construction volumes and a tightening price competition has put pressure on the general contractors tender
pricing and forced to take bigger risks. Merko Ehitus has historically been a valued partner in the private sector market and a
number of large new contracts with private customers have been concluded in 2015, especially in Estonia. In Latvia, the volume of
contracts entered into in 2015 was considerably lower than the volumes in the last few years; this mainly exerts an influence on
the sales revenue in 2016. We have observed that the price competition in the tenders has tightened even more which has led to
increased risks for both, the general contractors as the customers. In today’s market competitors are submitting aggressive offers,
anticipating that the input prices will decrease, however which may not materialise. As a result from the above the direct and
indirect risks have increased for the customers that are sometimes not perceived in the light of the favourable prices. Risks like
receiving a building that doesn’t meet the expectations, contractor’s financial difficulties and project completion delays disputes
between the parties arising from possible changes to the project and additional works etc. are all such potential risks which
existence must be acknowledged. At the same time, we see that the savvier private sector clients on the market are increasingly
opting to sign design-build contracts instead of mere construction contracts, as the end result a building that meets the
expectations is more likely with a professional partner who is responsible for the whole.
In 2015 the average profitability of new contracts signed by general contractor companies remained probably below last year’s
level depending on price competition and the continuation of the same trend is also visible in 2016. Competition between general
contractors within the Baltic construction market will continue to be tough and bidding for construction tenders will be aggressive.
This will provide a competitive edge to construction companies in the market that are efficient and have flexible cost base. Since
customers remain focused on the lowest construction cost, often also at the expense of quality, it is still difficult to stand out in
the competition with other general contractors, especially with regard to simpler and smaller construction projects; also the risks
related to bids submitted below the actual cost price have increased.
Considering the customers demand with regard to guarantees and lengthy payment terms, the stress on construction companies'
working capital continues to be high and capability for cash flow management is required to remain competitive. Merko companies
use the group's strong financial position as a competitive advantage in negotiations over payment terms.
Taking into account the relatively weak outlook for growth in the construction market, we do not foresee major changes in the
level of construction input prices, despite some wage pressure. Input prices may come under temporary pressure in a situation
where multiple major construction sites are in progress simultaneously. This could result in a rise in prices of certain inputs (such
as concrete elements). Also the level of Baltic states’ construction price indices have remained relatively stable during the last
year. Although one could assume that input prices decline due to the weakness in the construction market, as a result of the
general price inflation and trends in the labour market, this is not to be expected. Depending on what the Scandinavian economic
growth outcome is, in particular the development of construction sector, the corresponding effect could consequently influence
the labour costs. Subcontractors’ prices have this far not seen a decline similar to the drop in general contractors prices, which
means that general contractors margins are particularly under pressure – customers are exerting strong pressure for a price
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
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decrease in connection with the lower overall volumes on the construction market. Nonetheless, sudden fluctuations in input
prices cannot be ruled out against the backdrop of global economic events.
The level of indicators of confidence in the construction industry continues to be unfavourable in all three Baltic states, but is
nevertheless moderately favorale than at the end of the fourt quarter 2015 due to the start of the construction season. On a larger
scale, confidence is kept negative by the lack of demand – caused in turn by the expectation of reduced EU funds available for
future construction market investments, which will have a major impact on infrastructure construction. At the same time some
positive influence on sector confidence comes from construction of buildings, where today construction companies have presently
more work ahead.
Compared to the same periood last year, confidence in the construction sector in the Baltic countries in March 2016 fell in Latvia
(down 10.1 points from -16.6 points to -26.7 points) and in Lithuania (down 4.5 points from -16.5 points to -21.0 points). In March
2016, the Estonian level of construction confidence indicators was -7.0 points (March 2015: -22.1 points), being the only on in the
Baltic countries to have risen (by 15.1 points) in the year. The drop in confidence level in the construction sector in Latvia and
Lithuania compared to the same period last year mainly shows that in spite of the start of the construction season, construction
contractors in those countries are not as optimistic as their Estonian counterparts about market developments and access to EU
funding.
The construction price index continued to fall in 3 months of 2016 with respect to the average of the same period last year both in
Estonia (-0.7%) and Latvia (-1.2%), while in Lithuania the construction price index turned to growth (+1.9%). Of the construction
price components, the workforce component continued rising in all Baltic states, with Estonian and Latvian figures being
somewhat higher than Lithuanian. Construction material price components dropped in all Baltic states, while construction
machinery price components moved in different directions, decreasing in Estonia, staying the same in Lithuania and rising in Latvia.
Source: European Commission Directorate-General for Economic and Financial Affairs / Local national statistical offices.
3 MONTHS 2016
Estonia Latvia Lithuania
Construction price index annual change -0.7% -1.2% +1.9%
Labour force +1.9% +6.0% +6.5%
Construction machines -1.6% +0.6% +0.1%
Building materials -2.0% -4.5% -0.8%
Source: Local national statistical offices.
As one of the largest general contractors, AS Merko Ehitus Eesti, subsidiary of AS Merko Ehitus, is well positioned in the Estonian
construction market and is capable of competing in all activity segments, although there are many general contractors in general
construction market segment and there is a tight price competition, often at the expense of quality and contractual risks. In Latvia,
SIA Merks, a subsidiary of AS Merko Ehitus, belongs to among the leading general contractors. In Lithuania, UAB Merko Statyba, a
subsidiary of AS Merko Ehitus, has focused its construction activities mainly on apartment development and building (general
construction) segment that continue to experience tough competition in tenders. In the Lithuanian market, the position of general
contractors is also impacted by the activities of the so-called advisers that represent contracting authorities and complicate the
possibilities of general contractors to win construction contracts. Considering the volume of agreements concluded in Lithuania,
we hope to increase our revenues and market share.
APARTMENT DEVELOPMENT
After the last three years of fast growth, especially in Tallinn and Vilnius, the situation in the apartment market in all three Baltic
states is stabilising. We do not forecast a steep change in prices in the next 6-12 months. The increased supply of apartments has
been accompanied by moderate pressure on sales prices, expressed above all in clients’ desire for discounts, and a certain amount
of lengthening of sales periods in some projects. In Vilnius’s bedroom communities the supply has now clearly exceeded demand
and due to that we are expecting a lengthening of sales periods there. Still, we anticipate that despite the active supply on the
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
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apartment housing market, demand will stay strong for the high-quality apartments developed by the Merko Group, in all three
capitals of the Baltic states, and also in Tartu.
In the environment of increased supply and greater general awareness apartment buyers are even more focused on reliability
(experience and reputation of the developer and contractor), construction quality (energy efficiency, sound insulation) and make
their buying decisions based on infrastructure of the area (parking, services, logistics). In addition, the customers are focusing
more on the living environment of a neighbourhood as a whole.
Good availability of bank loans due to the strong capitalisation of banks and loans-to-deposits ratios is also continuously
supported by a low Euribor level, at the same time customers in Latvia are less inclined to take loans than in Estonia and Lithuania.
Apartment market demand is also positively impacted in addition to above by the lack of alternative investment opportunities, an
increase in incomes and a general improvement of the level of consumer confidence. Although the demand for loans has
increased, the proportion of loans in buying real estate or construction is substantially lower than in the boom years, which means
that more investments are made on equity.
Source: European Comission Directorate-General for Economic and Financial Affairs / Eurostat.
Many developers are starting new projects with more determination in all three Baltic states but above all in the capitals which
has increased the supply of new apartments. The increase in risks for some developers who may not make good on their business
plans could quietly begin to create expectations on the market for lower prices. None of the Baltic capital cities saw a significant
rise in the price of apartments in 2015 and apartment prices are not expected to increase significantly in 2016. Yet the prices of
apartments have risen, which is reflected by the corresponding price index curves for new dwellings in the respective countries
(see previous graph). It is also important to emphasize that the rise in prices of new developments in the Baltics has been
somewhat greater than the rise in prices on the apartment market in general.
The larger developers often finance the construction on new projects from their own funds and pre-payments made by customers.
As in the current market situation the banks continue to be reluctant to finance residential development projects of smaller
developers without a proven track record or require a large number of preliminary sales contracts (up to 50% of total project
volume) and a higher own equity contribution, which increases the confidence that there will be no major fluctuations in the
market. The trend also gives the Merko group, being a real estate developer with a long history and extensive references, a
competitive edge in launching new development projects to market.
A new trend that has become popular in Estonia is raising capital through crowdfunding. This is because there are few alternative
investment alternatives and the yields on crowdfunded projects are relatively aggressive. This funding scheme is novel and it is
possible that investors who join it do not have enough experience to assess risks related to the development projects, which is
also reflected by the fact that to this point the funded projects have been filled up very rapidly. To sum up, this means of funding
has given smaller developers better opportunities for entering the market, and launching such new projects has an impact on the
market above all through increasing supply, which in turn impacts the general price level and expectations on the market.
The Latvian apartment market continues to be passive. In the recent years the Latvian apartment market has been supported by
foreign investors who invest in real estate with the objective of acquiring a residence permit for the European Union. At the same
time, legislative amendments passed in Latvia in 2014 regarding the procedure for issuing residence permits made it harder for
non-residents to gain residency through acquiring real estate - the cost of real estate in order to obtain a residence permit rose to
EUR 250 thousand. As seen today, the effect of the change is that non-resident homebuyers have almost disappeared from Latvian
real estate market, which has a particular impact on the high-end segment real estate and particularly in Jurmala. Furthermore,
the Latvian real estate market is influenced more than those of the other Baltic states by the economic downturn in Russia and the
weaker rouble, as to this point a majority of the people buying real estate for the purpose of gaining an EU residence permit are
from Russia. In the Latvian capital Riga, Merko continues to focus on local homebuyers in the medium-priced segment.
The Lithuanian capital Vilnius has seen rapid growth in the supply of apartments above all in the cheaper price segments where
there is a certain amount of oversupply, which has already led to longer sales periods. On this backdrop, the bedroom community
market has developed a new trend: apartments built by some developers have started to be leased out long-term, up to three
years, with the obligation of later purchase. In addition, the Lithuanian central bank has approved the new terms of housing loans
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
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issued by commercial banks to individuals, which will make loans harder to access for buyers with lower purchasing power. Merko
group is focusing on the medium-range or more expensive segment located in the city centre of Vilnius.
THE TARTU ROAD RESIDENTIAL QUARTER IN THE HEART OF TALLINN TO BE COMPLETED AS A WHOLE. THE STAGE I APARTMENT
BUILDINGS ON A MAJOR ARTERY IN THE CITY CENTRE WILL BE COMPLETED BY THE END OF 2016 AND THE STAGE II BUILDINGS AT
INNER ALLEYS OF THE QUARTER WILL BE COMPLETED BY LATE 2017.
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
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OPERATING RESULTS
BUSINESS ACTIVITIES
Key financial indicators (in million euros)
3 MONTHS 2016 3 MONTHS 2015 12 MONTHS 2015
Revenue
Estonian construction service 19.0 17.1 108.6
Latvian and Lithuanian construction service 8.0 17.4 72.0
Real estate development 19.8 11.1 70.4
Revenue total 46.8 45.6 251.0
Gross profit 3.1 3.6 23.0
EBITDA 1.2 1.9 15.5
Operating profit (EBIT) 0.5 1.0 12.5
Profit before tax (PBT) 0.3 0.8 11.7
Net profit
attributable to equity holders of the parent 0.1 0.8 10.0
attributable to non-controlling interest (0.1) (0.1) (0.2)
Net profit total 0.0 0.7 9.8
Earnings per share (EPS), euros 0.01 0.05 0.56
Cash and cash equivalents closing position 34.4 40.9 39.9
REVENUE AND GROSS PROFIT
Merko Ehitus group generated a total of EUR 46.8 million in revenue in 3 months of 2016 (3 months of 2015: EUR 45.6 million).
40.7% of the revenue was generated in Estonian construction service, 17.0% in Latvian and Lithuanian construction service and
42.3% in and real estate development segment (3 months of 2015: 37.5% in Estonian construction service, 38.2% in Latvian and
Lithuanian construction service and 24.3% in real estate development segment). Compared to the 3 months of 2015 the group
revenue has increased by 2.7%. Compared to the 3 months of the previous year in the 3 months of 2016 the share of Latvian and
Lithuanian construction service revenue in the group’s revenue has decreased from 38.2% to 17.0% and the share of real estate
development revenues has increased from 24.3% to 42.3%. The main changes in the revenue structure compared to the same
period last year lie in a one-off increase in the sales revenue from immovable properties in the real estate development segment
and the growth in revenue from Estonian construction services’ general construction projects. At the same time, revenue is down
in the Latvian and Lithuanian constructions service segment. This trend has been in line with the group’s expectations, considering
the distribution of the secured order book as at the end of 2015.
In 3 months of 2016 the group’s gross profit from development and construction activities totalled EUR 3.1 million (3 months of
2015: EUR 3.6 million). The 3 months gross profit margin (6.5%) has decreased by 1.3 pp compared to the same period last year (3
months of 2015: 7.8%). Comparing the three-month results, it has been important for the group to preserve profitability in the
construction service domain in all three Baltic countries in spite of the prevailing competition situation on the construction market
and the decrease in sales volumes in regard to higher-margin civil engineering projects, which was supported by somewhat of a
drop in input prices, which may not continue in 2016. Gross profit margin has also been impacted by the decreased profitability in
the real estate development segment, which depends largely on the price of the land as part of the total specific project expenses
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
12
and is thus different on a project basis, but also by sold immovable properties with lower margin than average for the segment.
The scarcity of projects and the ever-tightening competition in the construction sector poses a great challenge in the maintaining
of the current gross profit margin for new procurements in all segments. The number of companies participating in tenders and
the risk of low pricing bids is high in all three Baltic states.
PROFIT BEFORE TAX AND NET PROFIT
In 3 months of 2016, the group’s profit before tax totalled EUR 0.3 million and net profit attributable to equity holders of the parent
was EUR 0.1 million as compared to the pre-tax profit or EUR 0.8 million and net profit attributable to equity holders of the parent
of EUR 0.8 million in 3 months of 2015. Group’s profit before tax margin was 0.6% (3 months of 2015: 1.8%) and the net profit
margin was 0.2% (3 months of 2015: 1.8%). Both the group’s profit before tax (EUR 0.3 million) and the profit before tax margin
(0.6%) have decreased compared to the same period last year (3 months of 2015: EUR 0.8 million and 1.8%, respectively).
BUSINESS SEGMENTS The group operates mainly in Estonian, Latvian and Lithuanian market through its subsidiaries. By purchasing a majority
shareholding the group has formed the basis for entering the Norwegian market starting from Q1 2016. Depending on the country
the group provides construction services and real estate development services across the following business segments: Estonian
construction service (incl. construction services on project basis in Finland), Latvian and Lithuanian construction service (incl.
construction services in Norway) and real estate development. The group’s segment structure is alined with group’s management
structure, see additionally the detailed management structure on page 28.
Estonian construction service (incl. construction services on project basis in Finland) and Latvian and Lithuanian construction
service service (incl. construction services in Norway) segments include all projects of the respective countries pertaining to
construction services:
ESTONIAN CONSTRUCTION
SERVICE
LATVIAN AND LITHUANIAN CONST-
RUCTION SERVICE
REAL ESTATE DEVELOPMENT
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
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- General construction consists of the construction of different buildings, from commercial and office buildings, retail and
entertainment centres to public sector and residential and specialised industrial buildings. Group companies provide
strategic consulting and quality complete solutions as part of the general contracting service of construction according
to the customer's requirements: preparation, design, construction, interior and warranty service. In the field of general
construction the group operates in all three Baltic countries and Norway.
- The civil engineering pürojects the group constructs include port, waste management and road structures (bridges,
tunnels, overpasses, roads), electrical construction of up to 330 kV, various environmental protection structures, water
treatment plants, both open-cut and trenchless construction of water and sewerage pipelines and other various
engineering projects. Complex and unique engineering projects require specialised knowledge and a good partnership
with the customer and local authorities. In this area the group operates in Estonia and Latvia.
- In the road construction division, the group carries out road construction and builds the associated infrastructure, road
maintenance and maintenance repair. In the area or road construction the group operates only in Estonia.
Real estate development is based on the development of real estate in the ownership of the group, encompassing development of
apartment projects, long-term investments into real estate and real estate projects executed for business purposes, and to a
minor extent also real estate maintenance and lease. In this segment, similarly to before, the group recognises projects being
developed in all of the different countries.
GROUP REVENUE AND GROSS PROFIT BY BUSINESS SEGMENTS
ESTONIAN CONSTRUCTION SERVICE
The Estonian construction services segment consists of various services in the field of general construction, civil engineering
(including construction of electrical and external networks) and road construction.
million EUR
3M 2016 3M 2015 CHANGE 12M 2015
Revenue 19.0 17.1 +11.4% 108.6
% of total revenue 40.7% 37.5% +8.4% 43.3%
Gross profit 1.0 1.4 -33.2% 10.4
Gross profit margin 4.9% 8.2% -40.0% 9.6%
In the 3 months of 2016, the revenue of the Estonian construction service segment was EUR 19.0 million (3 months of 2015: EUR 17.1
million), having decreased by 11.4% from the same period last year. The 3 months revenue also includes revenue from Finnish
projects in the amount of EUR 0.4 million (3 months of 2015: EUR 0.0 million). The revenues have clearly decreased in the field of
civil engineering and increased in the field of general construction. The increase in revenue in the field is primarily due to the fact
that large-scale general construction projects launched in 2015 – where previously design development took place – are gradually
starting to reach a stage of more extensive construction activity. If the revenue of the Estonian construction service segment have
formed the largest proportion in the group’s revenue in the previous periods, then in the 3 months of 2016 the Estonian
construction service segment revenues formed a 40.7% share, having decreased by 8.4% in the yearly comparison.
In this segment, the group earned a gross profit of EUR 1.0 million for 3 months (3 months of 2015: EUR 1.4 million). In 3 months of
2016, the gross margin of the Estonian construction service segment was 4.9%, which decreased by 3.3 pp compared to the 3
months of 2015 (8.2%), mainly due to the scarcity of projects in the field of civil engineering. In light of the close competition on the
Estonian construction services market and the drop in volumes of work for nearly all market participants, we consider this as a
satisfactory result. Due to the decrease in the volume of public procurements, we are critically monitoring any changes in the
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
14
volume of work-in-progress and also constantly improving the efficiencies of internal project management processes. We have
reduced and re-allocated staff within the group and, in order to maintain the efficiency of the cost base, made preparations for
responding to further market changes.
Our major projects in the first quarter included the construction works of Hilton Tallinn Park hotel, the design and construction
works of Öpik Office Building in Tallinn, the design and construction works of T1 shopping centre in Tallinn, the reconstruction work
an office building located at Mustamäe tee 3, Tallinn and the road maintenance works done under the service agreement with
Tallinn.
LATVIAN AND LITHUANIAN CONSTRUCTION SERVICE
The Latvian and Lithuanian construction service segment consists of general construction work in both of the aforementioned
Baltic countries and stating from the first quarter of 2016 also in Norway and provision of civil engineering services in Latvia.
million EUR
3M 2016 3M 2015 CHANGE 12M 2015
Revenue 8.0 17.4 -54.3% 72.0
% of total revenue 17.0% 38.2% -55.5% 28.7%
Gross profit 0.3 1.0 -68.8% 4.8
Gross profit margin 3.9% 5.7% -31.8% 6.7%
The revenue of the Latvian and Lithuanian construction service segment amounted to EUR 8.0 million in the 3 months of 2016 (3
months of 2015: EUR 17.4 million), which is 54.3% less than in the 3 months of 2015. If the Latvian and Lithuanian construction
service segment revenues of 3 months of 2015 formed 38.2% of the group’s revenue, then during 3 months of the current year the
segments revenues have decreased to 17.0%. The change in this percentage was in line with expectations, considering the lower
level of new contracts signed in Latvia and Lithuania during 2015 and the 2015 comparison base, where large-scale projects were
in progress in Latvia, such as the construction of Liepaja Concert Hall and Polipaks NT manufacturing and logistics centre. The
group’s continued focus is on increasing the revenues outside Estonia. The 3 month gross profit of the Latvian and Lithuanian
construction service segment amounted to EUR 0.3 million (3 months of 2015: EUR 1.0 million) and the gross profit margin was
3.9% (3 months of 2015: 5.7%), which decreased by 31.8% compared to the same period previous year.
In the first quarter of 2016, the main ongoing projects included were the construction of kindergarten and school buildings complex
near Riga in Pinki, the construction works of the second phase of the passanger terminal in Riga International Airport and the
construction works of Kauno/Algirdo residential complex with office premises in Vilnius.
REAL ESTATE DEVELOPMENT
The real estate development segment includes residential construction, the development of apartment projects, long-term real
estate investments and commercial real estate projects.
million EUR
3M 2016 3M 2015 CHANGE 12M 2015
Revenue 19.8 11.1 +79.0% 70.4
% of total revenue 42.3% 24.3% +74.3% 28.0%
Gross profit 1.8 1.2 +56.1% 7.8
Gross profit margin 9.2% 10.5% -12.8% 11.0%
The group sold a total of 101 apartments in 3 months of 2016 at the total value of EUR 11.4 million (excl. VAT), compared to 62
apartments and EUR 10.8 million in 3 months of 2015. In 3 months of 2016, the group has earned EUR 7.5 million of revenue from
the sale of immovable properties (3 months of 2015: EUR 0.0 million). In 3 months of 2016 real estate development segment
revenues have increased 79.0% compared to the same period last year. This is mainly because of the one-time effect of revenues
from the sale of immovable properties that are strategically not needed by the group, the profitability of which is not comparable
with a situation where the value of land is increased by passing through all phases of the development process.. The share of
revenue from the real estate development segment has increased as anticipated in the 3 months to 42.3% of the group’s total
revenue (3 months of 2015: 24.3%), forming the the largest proportion in the group’s revenue having increased by 74.3%.
The 3 month gross profit of the segment amounted to EUR 1.8 million (3 months of 2015: EUR 1.2 million) and the gross profit
margin was 9.2% (3 months of 2015: 10.5%), which decreased by 12.8% compared to the same period previous year. The
profitability of the apartment development projects varies by project and depends greatly on the cost structure of the specific
project, incl. the land acquisition price. The sector’s gross profit of the first three months was also significantly influenced by the
fact that revenue from the sale of immovable properties with lower than average profitability made up a noteworthy share of total
revenue in the segment.
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
15
At the end of the period, group’s inventory comprised 217
apartments where a preliminary agreement had been signed:
34 completed apartments (26 in Estonia, 5 in Latvia, 1 in
Lithuania and 2 in Finland) and 183 apartments under
construction (136 in Estonia, 8 in Latvia and 39 in Lithuania).
The sale of these apartments had not yet been finalised and
delivered to customers, because the development site is still
under construction or the site was completed at the end of
the reporting period and the sales transactions have not all
been finalised yet.
As at 31 March 2016, Merko Ehitus group had a total of 457
apartments for active sale (as at 31 March 2015: 361
apartments), for which there are no pre-sale agreements
and of which 73 have been completed (23 in Estonia, 27 in Latvia, 16 in Lithuania and 7 in Finland) and 384 are under construction
(281 in Estonia, 44 in Lithuania and 59 in Lithuania). The number of apartments on sale as at 31 March 2016 has increased,
compared to 31 March 2015, mainly due to the volume of projects launched in the fourth quarter of 2015 and the first quarter of
2016: launch of construction of 278 new apartments, compared to the 162 new apartments in the reference period.
APARTMENT PROJECTS IN PROGRESS AND INDICATIVE DATE OF COMPLETION
PROJECT MUNICIPALITY/COUNTRY COMPLETION DATE NO OF UNSOLD
APARTMENTS *
INCL. PRE-SOLD
APARTMENTS
Grostonas 17 Riga, Latvia Completed 1 -
Grostonas 19 Riga, Latvia Completed 11 1
Grostonas 21 Riga, Latvia Completed 20 4
Pärna avenue 12 Tartu municipality, Estonia Completed 4 -
Pärna avenue 11 Tartu municipality, Estonia Completed 1 -
Rästa 18 Tallinn, Estonia Completed 1 1
Paepargi 49 Tallinn, Estonia Completed 10 -
Kaupmehe 7 Tartu municipality, Estonia Completed 4 1
Fizikų 8 Vilnius, Lithuania Completed 15 1
Kraziu 9 Vilnius, Lithuania Completed 2 -
Paepargi 29, 31, 33 Tallinn, Estonia Completed 29 24
Pestikuja 1 Helsinki, Finland Completed 9 2
107 34
Tartu mnt 52 stage I Tallinn, Estonia End of 2016 103 70
Jahu 1a Tallinn, Estonia Autumn of 2016 37 29
Krokuvos 73 Vilnius, Lithuania Summer of 2016 98 39
Sõpruse pst 33 Tallinn, Estonia End of 2016 51 14
Grostonas 12 stage I Riga, Latvia Beginning of 2017 52 8
Kivimäe 32 *** Tallinn, Estonia Summer of 2016 24 5
Kaupmehe 5 Tartu municipality, Estonia Summer of 2016 30 9
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
16
PROJECT MUNICIPALITY/COUNTRY COMPLETION DATE NO OF UNSOLD
APARTMENTS *
INCL. PRE-SOLD
APARTMENTS
Tartu mnt 52 stage II Tallinn, Estonia Autumn of 2017 82 2
477 176
Started in Q1 2016
Paepargi 51 ** Tallinn, Estonia Beginning of 2017 60 7
Kaupmehe 5 ** Tartu municipality, Estonia Beginning of 2017 30 -
90 7
Total 674 217
* The completed apartments indicate the number of apartments that are unsold and where possession has not been given to
consumers.
** Project launched in 2016.
*** A project developed by a joint venture. Group revenue generated through provision of construction services and profit
recognised based on the equity method.
In 3 months of 2016, we launched the construction of a total of 90 new apartments in the Baltic states (3 months of 2015: 103
apartments). In the 3 months of this year, the group has invested a total of EUR 10.1 million (3 months of 2015: EUR 10.7 million) in
new development projects launched in 2016 as well as projects already in progress from previous year.
We will continue to invest in residential real estate projects and depending on the apartment market developments in 2016, the
group will launch the construction of approximately 500-550 new apartments in the Baltic states (2015: construction of 574 new
apartments launched). In 2016, the group’s investments in both development projects initiated in the previous years and new
projects to be launched in 2016 will be in the range of EUR 40-45 million (2015: EUR 42.4 million invested).
One of our objectives is to keep a moderate portfolio of land plots to ensure stable inventory of property development projects
considering the market conditions. At 31 March 2016, the group's inventories included land plots with the development potential,
where the construction works have not started, of EUR 50.5 million (31.03.2015: EUR 59.5 million; 31.12.2015: EUR 58.0 million).
GROUP’S INVENTORIES WITH DEVELOPMENT POTENTIAL BY COUNTRY
million EUR
31.03.2016 31.03.2015 31.12.2015
Estonia 8.9 18.4 14.0
Latvia 32.3 36.9 34.8
Lithuania 9.3 4.2 9.2
Total 50.5 59.5 58.0
In the 3 months of 2016, the group has not purchased any new land plots for real estate development pruposes (3 months of 2015:
different new land plots in Tallinn, Estonia acquired at an acquisition cost of EUR 5.1 million). Also the group signed a notarised
contract of sale of registered immovables, under which all of the real estate governed by an option agreement in Tallinn were
realised for total of EUR 4.0 million. The group is searching for new land plots for real estate development purposes primarily in
Estonian and Lithuania.
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
17
SECURED ORDER BOOK As at 31 March 2016, the group’s secured order book (without own developments) amounted to EUR 243.5 million as compared to
EUR 167.2 million as at 31 March 2015. The secured order book excludes the group's own residential development projects and
construction work related to developing real estate investments.
In first quarter of 2016, EUR 22.4 million worth of new contracts were signed (without own developments) as compared to EUR
22.4 million in same period last year.
LARGEST CONSTRUCTION CONTRACTS SIGNED IN THE FIRST QUARTER OF 2016
BRIEF DESCRIPTION OF CONTRACT COUNTRY COMPLETION TIME COST
MILLION EUR
Design and construction works on Tennis and Sports Complex
first stage in Tallinn Estonia End of 2016 7.0
Design and construction works of BAUHAUS DIY store in
Haabersti district of Tallinna Estonia April of 2017 7.6
After the balance sheet date, the group concluded one large construction contract:
On 7 April 2016, SIA Merks – a subsidiary of AS Merko Ehitus – signed a contract with SIA Decco Centrs to perform the design
and construction works of warehouse complex, located at Katlakalna street 6D, Riga, Latvia. The value of the contract is
approximately EUR 4.8 million. The works are scheduled for completion by June of 2017.
Of the contracts signed in the 3 months of 2016, private sector orders accounted for the majority proportion, which is also
represented in the group’s secured order book as at the end of the reporting period, where private sector orders from projects in
progress constitute 80% (31.03.2015: approximately 60%; 31.12.2015: approximately 80%). Apart from a few large-scale
procurements where Merko companies were not as optimistic as our competitors in bidding at a low price, the share of
government contracts in the 3 months of 2015 has been modest. The group continues to focus on comprehensive design and
construction contracts. In this regard, two important contracts were signed in Estonia in the first three months of 2016.
The portfolio of contracts stands strong, especially in Estonia. At the same time, the group has not managed to conclude new
contracts in the estimated volume, especially in Latvia and Lithuania. This is due to a lower-than-estimated number of orders on
the market, which will also affect the volumes for 2016. Considering the beginning phase of the current EU funding period, one can
forecast the volume of public procurements to stay at the previous years level. We forecast that the volume of public
procurements will start to increase in the second half of 2016. In this respect, it will not be easy to maintain the secured order book
at the level of 2015 or growing it.
Traditionally the share of Estonian construction activity has been the highest in the group's revenues. Given the weak growth
outlook of the Estonian construction market, the group's goal is to increase the volume of construction orders from outside
Estonia. Thus, we will continue to identify and strengthen the groups competitive advantages and are closely monitoring the
development and opportunities both in the Baltic states and the Nordic countries. Starting from 2014 AS Merko Ehitus Eesti has
selectively and on project basis participated in procurements in Finland, Sweden and Norway in order to gain experience and
sufficient knowledge in the qualification conditions, requirements established and risks associated in these countries. As a result
of this activity, the group has carried out its first projects in Finland in 2015 and as a follow-up to this, in March 2016, a controlling
holding was acquired in Peritus Entreprenør AS, a Norwegian construction company that provides general construction services.
The group will continue to implement the chosen strategy and to pursue revenue from new markets also in 2016.
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
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CASH FLOWS As at 31 March 2016 the group had cash equivalents in the amount of EUR 34.4 million (31.03.2015: EUR 40.9 million; 31.12.2015: EUR
39.9 million). The group's cash level is lower compared to the same period last year; still, the financial position is strong, as the
group has not utilized its credit lines of existing overdrafts and loan agreements and has not concluded loan agreements for
financing all of the projects in development.
The 3-month cash flow from operating activity was negative at EUR 1.6 million (3 months of 2015: negative EUR 7.9 million), cash
flow from investing activity was positive at EUR 0.9 million (3 months of 2015: negative EUR 0.2 million) and the cash flow from
financing activity was negative at EUR 4.8 million (3 months of 2015: negative EUR 2.6 million).
The cash flow from operating activity was mostly influenced by the EBITDA (operating profit adjusted with depreciation and
amortisation) EUR 1.2 million (3 months of 2015: EUR 1.9 million), by the negative change in receivables and liabilities related to
construction contracts recognised under the stage of completion method EUR 3.5 million (3 months of 2015: negative change of
EUR 4.6 million), by the negative change in the provisions EUR 2.8 million (3 months of 2015: negative change of EUR 4.6 million), by
the positive change in trade and other receivables related to operating activities EUR .4 million, incl. a negative change in financing
co-financed projects of EUR 1.6 million (3 months of 2015: positive change of EUR 5.0 million, incl. a negative change in financing
co-financed projects of EUR 0.0 million), by the positive change in inventory EUR 6.6 million, incl. positive cash flow from sale of
immovable properties in the amount of EUR 7.5 million (3 months of 2015: negative change of EUR 2.3 million, incl. negative cash
flow from purchase of new land plots in the amount of EUR 5.1 million), by the negative change in trade and other payables related
to operating activities EUR 2.9 million (3 months of 2015: negative change of EUR 3.5 million, incl. significant negative outflow from
the realization of an option agreement in the amount of EUR 4.0 million but also from the advances for real estate development
projects).
To support cash flows arising from operating activity, the group has been cautious in raising additional external capital, including
factoring. At the same time, the debt ratio has remained at a moderate level (12.9% as at 31.03.2016; 14.6% as at 31.03.2015; 14.8%
as at 31.12.2015).
Cash flows from investment activities include negative cash flow from the acquisition of non-current asset in the amount of EUR
0.5 million (3 months of 2015: EUR 0.3 million) and the positive cash flow from the sale of non-current assets in the amount of EUR
0.1 million (3 months of 2015: EUR 0.1 million). The group mainly invested in non-current assets for the purpose of renewing its
fleet of machinery in the road construction segment. Cash flows from investment activities in 3 months of 2015 was also positively
impacted by the acquisition of majority shareholding in subsidiary Peritus Entreprenør AS (related to the offering of construction
services on Norwegian market) in the amount of EUR 1.2 million.
Project specific loans obtained using investment property as collateral were repaid in the amount of EUR 0.1 million (3 months of
2015: negative cash flow in the amount of EUR 0.1 million). Net of loans received and loans repaid in connection with development
projects amounted to negative cash flow of EUR 2.7 million (3 months of 2015: negative cash flow of EUR 2.1 million) and finance
lease principal repayments of EUR 0.2 million (3 months of 2015: EUR 0.4 million). In addition, over the first three months of 2016,
the group made repayments in the amount of EUR 1.0 million to related party AS Järvevana pursuant to the terms and conditions of
an overdraft agreement between the parties. The group has not used bank loans to finance all ongoing development projects – and
this is the case particularly in Estonia, where many advance sales were agreed in the early phase of construction.
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
19
RATIOS (attributable to equity holders of the parent)
3M ‘16 3M ‘15 3M ‘14 12M ‘15
Income statement summary
Revenue million EUR 46.8 45.6 48.9 251.0
Gross profit million EUR 3.1 3.6 3.9 23.0
Gross profit margin % 6.5 7.8 8.1 9.1
Operating profit million EUR 0.5 1.0 1.3 12.5
Operating profit margin % 1.0 2.2 2.7 5.0
Profit before tax million EUR 0.3 0.8 1.1 11.7
PBT margin % 0.6 1.8 2.3 4.7
Net profit million EUR 0.0 0.7 0.6 9.8
attributable to equity holders of
the parent million EUR 0.1 0.8 0.7 10.0
attributable to non-controlling
interest million EUR (0.1) (0.1) (0.1) (0.2)
Net profit margin % 0.2 1.8 1.5 4.0
Other income statement indicators
EBITDA million EUR 1.2 1.9 1.9 15.5
EBITDA margin % 2.5 4.1 3.8 6.2
General expense ratio % 6.8 6.5 6.1 4.8
Labour cost ratio % 14.2 13.7 13.9 12.2
Revenue per employee thousand
EUR 62 62 61 322
Other significant indicators 31.03.2016 31.03.2015 31.03.2014 31.12.2015
Return on equity % 7.5 10.1 7.8 8.0
Return on assets % 4.3 5.0 3.9 4.4
Return on invested capital % 7.8 8.5 7.3 7.9
Equity ratio % 62.3 53.1 51.0 59.5
Debt ratio % 12.9 14.6 13.4 14.8
Current ratio times 3.4 2.6 2.0 3.2
Quick ratio times 1.3 1.1 1.1 1.2
Accounts receivable turnover days 35 51 59 39
Accounts payable turnover days 35 41 41 39
Average number of employees people 755 742 800 779
Secured order book million EUR 243.5 167.2 224.0 246.9
Calculation of ratios is provided on page 33 of the report.
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
20
RISK MANAGEMENT Risk management is part of strategic management and is inseparable from daily operations of the company. In managing risks, the
main objective of the company is to determine larger and more significant risks and to optimally manage these risks so that the
company achieves its strategic and financial objectives. The company considers it important to assess aggregate group’s risks,
instead of the impact factors of individual risks. Turning constant attention to risk management enables to exclude or minimise a
possible financial loss. The following are deemed by the company to be the most significant risks: market risk, operational risk and
financial risk, including interest rate risk, foreign currency risk, credit risk, liquidity risk, equity risk and legal risks.
Because of the group’s balance sheet structure and the
market position, none of these risks has a significant
impact as at the date of this report.
Group risk management is coordinated by the management board. In addition the management board of each subsidiary develops,
implements and maintains processes covering subsidiarys activities for the management of all material risks impacting the
activity and results of the group. Each group company and business unit must ensure that risks are managed on an ongoing basis
with reference to the objectives it has been assigned. Risk-taking is a normal part of business but in doing so, one must be
convinced that if the risk materialises, purposeful and sustainable activity is maintained with reference to the strategy of the
company and business unit. The group assesses ongoing business risks and risks affecting development projects in a calculated
manner.
Merko Ehitus divides risks into four main categories:
Business risk
The group takes calculated risks for the purpose of increasing revenue. The biggest business risks relate to the entry of Merko
Ehitus to new markets and segments, the management of existing inventories and investments and the execution of awarded
construction contracts. One of the peculiarities of construction activities is the fact that the execution of the contracts concluded is
a long-term process, making the sector inert to changes in the economic environment. Due to this, both positive and negative
changes in the economic environment reach the construction industry with a lag of approximately 12-18 months. This time lag
enables the sector to arrange its activities to be prepared for potential setbacks as well as booms.
Operating in several different markets requires orientation in the environments of various countries. The main areas of attention
are the different cyclicality attributes of different economies and legal, cultural and political differences. The main objective of
Merko Ehitus is to expand into new segments in existing markets. When entering new markets, the company thoroughly studies
local customs and peculiarities before making final investment decisions and makes sure that the environment is sufficiently
stable and a competent team is assembled.
From the investments point of view, the main risks relate to the portfolio of properties and implementation of property
development projects. Merko Ehitus carries out real estate development projects as an integrated process, comprising all
activities from the acquisition of the property, proceedings related to the detailed plan, handling design and construction and
finally sale of finished apartments to the customer and warranty service. The group uses standard policies for implementing real
estate development projects in order to ensure the use of best practices that the entire group has accumulated over years. Merko
Ehitus continuously analyses its existing inventory of land with development potential to ensure that the portfolio contains a
sufficient number of properties to carry out developments suitable to the market. Investments in new properties of up to EUR 3
million are decided on the supervisory board level of subsidiaries and then further approved by the supervisory board of the group.
Market risk
Significantly more attention is being paid to potential volatility of input prices in the construction sector that could complicate the
budgeting process, completion of projects at planned costs, cause additional risks in carrying out fixed-price construction
contracts and weaken projects’ profitability. Therefore, the overall economic development is being closely monitored and taking
excessive price risks already in the bidding phase is avoided.
The residential development area is one of the main sources of market risk arising from the value of real estate for Merko Ehitus
group. The real estate market has become more selective and in pre-launch risk assessment, consideration is given to such
important aspects as the project’s location, development volume, planning solutions and the target group. Taking into account low
interest rates on loans and limited supply on the market of new apartments, in the last three years the demand and transaction
activity on the apartment market has grown moderately. Due to the selectiveness of the real estate market, setting the right sale
BUSINESS RISK MARKET RISK FINANCIAL RISK OPERATIONAL RISK
HEALTH AND SAFETY RISK
ENVIRONMENTAL RISK
The company manages risks so as to achieve
its strategic and financial objectives.
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
21
price for new development projects in the given region have become very important. For hedging the area’s price risk, price
statistics collected by the group and available from other public sources is being constantly analysed.
Operational risk
Operational risks are risks caused by inadequate or ineffective processes, people, equipment, systems or external events. The
main goal of operational risk management is to reduce the effect of unwanted events. In order to meet the objective, the group is
developing internal processes and control systems. In order to ensure the group's high level of project management, project teams
are continuously trained, business processes are improved and results are monitored.
Considering the group's field of business, it is essential in operational risk management that the improvement and application of
safety standards and regulations continues and that supervision of compliance with environmental requirements is increased. One
measure for managing operational risks is the implementation of quality and environmental management systems. Risks related
to occupational health and safety in construction are assessed and managed in all units and process stages of the group. The
largest construction companies of the group have implemented ISO 9001/14001 management systems and Merko Ehitus Eesti,
Merko Infra, Merko Tartu and Latvian and Lithuanian subsidiaries have implemented the occupational health and safety
management system OHSAS 18001. The group employs full-time quality specialists who are responsible for developing quality,
safety and management systems and ensuring their functioning.
Insurance is used as additional mitigation of operational risks, especially for risks that cannot otherwise be mitigated. The group
concludes total risk insurance contracts with insurance companies in order to hedge the risk of unanticipated loss events
occurring in the construction process. The general policy is entered into for one year and it compensates the customer,
subcontractors and third parties for any losses caused by Merko Ehitus or its subcontractor for up to EUR 9.6 million. The risks of
the projects which cost exceeds EUR 9.6 million or the annual policy does not cover (water construction, railroad construction,
bridges, etc.) are additionally mapped out and an insurance contract is concluded separately for each object taking into
consideration its peculiarities. In concluding contracts for services involving design work, an insurance contract for professional
liability is required from subcontractors or an insurance contract at own expense is concluded, covering the damage arising from
design, erroneous measurement, advice and instructions. The services of insurance brokers are used in mapping out risks,
concluding insurance contracts and handling loss events.
A warranty provision has been provided at the company to cover for the construction errors which have become evident during the
warranty period. As at the period-end, the company’s warranty provision amounted to EUR 2.4 million (31.03.2015: EUR 2.1 million).
With regard to work performed by subcontractors, the subcontractors are responsible for elimination of defects that became
evident during the warranty period. With regard to critically significant contracts, the performance of contractual obligations of
the contractor arising from contracts of services is guaranteed with bank guarantees to be paid upon first demand.
Financial risk
Financial risks include risks related to adequate capitalisation level and financing, currency, interest rate and credit risk. Financial
risks are managed through accounting and finance rules, as well as audit. The group’s finance department is ultimately
responsible for forecasting the cash flows of Merko Ehitus, continuously monitoring various subsidiaries' cash positions and
forecasts. The group has enacted a regular budgeting procedure whereby the group's annual forecasts are updated as a minimum
four times per year.
Credit risk
Credit risk relates to a potential damage which would occur if the parties to the contract are unable to fulfil their contractual
obligations. For mitigating credit risk, the payment behaviour of clients is constantly monitored, their financial position is analysed
and if necessary, third persons are engaged as a guarantor in transactions. Construction activities are partially financed by
customer prepayments. As a rule, a precondition for receiving a prepayment is a bank guarantee for the prepayment submitted to
the customer. Free cash is mostly held in overnight deposits or term deposits at Swedbank, LHV, SEB, Nordea and DnB bank groups.
The management estimates that the group is not exposed to significant credit risk.
Interest risk
Interest risk arises from interest rate changes in the financial markets as a result of which it may be necessary to revalue the
group’s financial assets and take into consideration higher financing costs in the future. Most of the group’s bank loans have
floating interest rates based on either Euribor. The management considers the share of interest-bearing liabilities in the group’s
capital structure to be moderate (as at 31.03.2016, 12.9% of the balance sheet total; as at 31.03.2015, 14.6% of the balance sheet
total) and effect of changes in the interest rate environment to be insignificant for the group’s results over the next 12-month.
Currency risk
The group’s economic activities are conducted mainly in the currencies of the countries of location of the companies: euros in
Estonia, Latvia and Lithuania and kroons in Norway. Transactions within the group are conducted in euros as a rule. To eliminate
foreign currency risks, close track is kept of the proportions of the company’s assets and liabilities held in different currencies and,
when it comes to entering into long-term construction contacts, the euro is the preferred currency in the Baltics, and, in Norway,
the krone. Considering the fact that the materials and services used in construction are generally from the local market or supplied
from within the EU, the currency risk in the group is currently minimal.
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
22
Liquidity risk
The company’s liquidity or solvency represents its ability to settle its liabilities to creditors on time. As at 31.03.2016, the group´s
current ratio was 3.4 (31.03.2015: 2.2) and the quick ratio 1.3 (31.03.2015: 1.0). To complement available current assets, and to
ensure liquidity and better management of cash flows, the group has concluded overdraft agreements with banks. As at end of the
period, the group entities had concluded overdraft contracts with banks in the total amount of EUR 23.1 million, of which nothing
had been withdrawn (incl. an overdraft contract to finance development projects in the amount of EUR 14.5 million, which has not
been withdrawn), (31.03.2015: EUR 10.3 million, of which EUR 9.7 was unused). In addition to the overdraft facility, the company has
a current loan facility with the limit of EUR 3.5 million (31.03.2015: EUR 3.5 million) from AS Riverito, which has not been withdrawn
at the end of current and previous financial periods.
The management estimates that the group’s capital structure – a solid proportion of equity at 62.3% (31.03.2015: 53.1%) of the
balance sheet total and a moderate proportion of interest bearing liabilities at 12.9% (31.03.2015: 14.6%) of the balance sheet total
– ensures the company’s trustworthiness for creditors in the changing economic climate and significantly improves the feasibility
of the extension of existing financial liabilities and raising of additional debt.
Legal risk
Due to different interpretations of contracts, regulations and laws related to group’s principal activities, there is a risk that some
buyers, contractors or supervisory authorities evaluate the company’s activities from the perspective of laws or contracts from a
different position and dispute the legitimacy of the company’s activities.
As at 31 March 2016, a provision has been set up at the group in the amount of EUR 0.1 million (31.03.2015: EUR 0.2 million) for
covering potential claims and legal costs.
An overview of the key legal disputes of group entities ended during 2016 and ongoing as of 31.03.2016 is presented below:
Estonia
Lawsuit against former employee
On 17 December 2014, AS Merko Infra filed a claim in Harju County Court against a former AS Merko Infra employee, Maksim
Vihharev, seeking EUR 97 thousand in damages (EUR 84 thousand being the principal claim and EUR 13 thousand late interest)
along with a petition to secure the action. The lawsuit relates to intentional damage caused by fictitious transactions concluded by
Maksim Vihharev on behalf of AS Merko Infra while serving as electrical work project manager and purchase of items not
necessary for contractual work. The potential positive outcome of this suit is not recognised in the group’s financial reporting.
On 3 March 2015, Maksim Vihharev filed an action in Harju County Court against AS Merko Infra seeking compensation for alleged
damage to his reputation. The plaintiff is seeking EUR 6,658 thousand in reparations plus damages in an undetermined amount due
to alleged impairment of his health. The abovementioned legal formulation is legally opaque and unjustified, and as a result AS
Merko Infra does not acknowledge the Maksim Vihharev’s claim, deems the said demand to be without merit, and is petitioning the
court to dismiss it. On 22 January 2016, Harju County Court refused to hear the action filed by Maksim Vihharev against AS Merko
Infra (civil matter No 2-15-6047), in which Maksim Vihharev accused AS Merko Infra of defamation and of causing damage thereof.
Appeal for the revocation of the order of the Minister of the Environment
On 7 April 2015, Suur-Paekalda OÜ and Väike-Paekalda OÜ, which are the subsidiaries of AS Merko Ehitus, filed an appeal to the
Tallinn Administrative Court for the revocation of the Order of the Minister of the Environment No. 22 of 27 March 2015, by which
the boundaries of the permanent habitat of protected plants, which were established by the Minister of the Environment Order No.
9 of 3 February 2006, were amended so that the disputed registered immovable properties at Paekalda St were excluded from
protected area. The primary objective of the appeal is to prevent the release of the immovable properties from nature
conservation restrictions, which would justify the refusal to acquire the immovable properties by the state. The appeal is in
progress.
On 2 February 2016, AS Merko Ehitus subsidiaries Suur-Paekalda OÜ and Väike-Paekalda OÜ filed a complaint in Tallinn
Administrative Court for compensation of damage. The plaintiffs are seeking a ruling ordering that the state pay damages of EUR
3,162,500 to Suur-Paekalda OÜ (amount to be determined) and EUR 1,587,500 to Väike-Paekalda (amount to be determined) as well
as late interest at the rate specified in subsection 113 (1) of the Law of Obligations Act starting from 2 February 2016 until due
compliance with the demand for compensation.
The claim is based on the fact that Minister of the Environment regulation no. 9 of 3 February 2006 established a species
protection site to protect the habitat of alpine chickweed, ascending saxifrage and dianthus superbus on the Maarjamäe klint
(limestone cliff), even though as late as in the 1998 detailed planning proceedings, the Tallinn Environment Department and the
Ministry of the Environment did not consider the restrictions on the Paekalda immovable properties to be merited. The formation
of the species protection site meant that construction was prohibited on the immovable properties owned by the plaintiffs.
Although the state should have bought the immovable properties under nature protection from the plaintiffs after the species
protection site was established, the state launched a review of the boundaries of the species protection site in order to evade the
obligation of acquiring the plots. The plaintiffs thus lost the opportunity to implement the detailed plan in the favourable real
estate market situation that prevailed in 2006-2007. As a result, the plaintiffs have incurred losses in regard to the revenue
forgone and direct patrimonial damage caused by impossibility of realizing the right of superficies arising from the detailed plan.
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
23
Latvia
Lawsuit against former employee
On 5 May 2015, SIA Merks filed suit in Riga District Court against former SIA Merks employee Rolands Mēnesis in a claim for the
compensation of damage amounting to EUR 337 thousand. Previously, on 2 March 2015, SIA Merks had filed a petition to secure the
action in the same amount, which was duly granted by the court. The object of the statement of claim is damage deliberately
caused by project manager Roland Mēnesis by entering into fictitious transactions on behalf of SIA Merks and purchase of items
not necessary for contractual work. The possible effect of the potential positive outcome of this suit has not been taken into
account in the group’s financial reporting. On 6 April 2016 the case was transferred to Ogre District Court in order to expedite the
reviewing of the case. The following court hearing is scheduled for 3 November 2016.
On 18 June 2015, SIA Merks filed an action against Rolands Mēnesis for termination of the employment contract due to entry into
transactions and conduct of operations causing damage to SIA Merks as described above in accordance with the Latvian law,
which provides for the corresponding procedure in cases where the trade union objects to the dismissal of an employee. The
statement of claim has been accepted. On 12 January 2016, Rolands Mēnesis filed a counterclaim against SIA Merks, asking the
court to declare unlawful the removal from work and order SIA Merks to pay damages in the amount of average remuneration,
starting from the initial suspension of the employment contract (7 January 2015), as well as non-patrimonial damage in the
amount of 12-month average remuneration. The next hearing is scheduled to take place on 23 August 2016.
Lithuania
Vakarų
At 25 May 2012, RUAB Vakarų inžineriniai tinklai (hereinafter “Vakaru”) filed a claim against the Lithuanian branch of AS Merko
Ehitus in the amount of EUR 197 thousand, related to the repeal of the joint venture contract concerning the sewerage and
wastewater pipeline project (project “Construction of Sewerage and Wastewater Pipelines in Seda, Plinkšiai and Bugeniai”).
Although it was the view of AS Merko Ehitus that the joint venture agreement was terminated for cause due to breaches of the
partner, not illegally the court ruled in the matter in favour of Vakarų on it’s decision from 29 April 2015. The said decision took
effect on 7 February 2016 when the Lithuanian Supreme Court decided not to admitte to proceedings the cassation appeal filed by
AS Merko Ehitus.
In the end of 2012, bankruptcy proceedings were initiated against Vakarų. In relation to that, AS Merko Ehitus has filed creditor's
claims (incl. claims for damages) in the bankruptcy proceedings totalling EUR 1,220 thousand. Said claim (incl. claim for damages)
is not included on the group's balance sheet and claims that arose earlier were already provisioned in full in 2012.
On 4 April 2014, District Court of Plungė, made the judgement in the litigation with regard to declaring invoices partially unjustified,
which fully satisfied the claim of AS Merko Ehitus. On 5 May 2014, Vakarų appealed the court decision to Klaipeda District Court,
which decided to return the case back to District Court of Plungė. On 22 of April 2015 the court took the decision to commission
expert analysis to establish whether the disputed work had been performed or not. The judicial proceedings on the action are
suspended until completion of the expert analysis. The court hearing regarding the litigation to declaring invoices partially
unjustified took place on 10 November 2015, where the court decided to appoint another expert to analyse the new matters raised.
The following court hearing is scheduled for 12 May 2016.
EMPLOYEES AND LABOUR COSTS Compared to the same period last year, the number of group’s employees increased by six (+0.8%) and as at 31 March 2016, the
group had a total of 782 employees (including fixed-term and part-time employees). The number of empolyees has increased
mainly due to the acquisition of a 56% subsidiary Peritus Entreprenør AS in Noway with 11 employees.
The group’s objective is to pay its employees competitive salary. The interests of employees and the company are balanced by
performance-based remuneration.
The group defines labour cost as salary (incl. fixed salary, additional pay (night work, overtime and public holidays), holiday pay
and bonus), taxes based on salary, fringe benefits and taxes based on fringe benefits. In 3 months 2016, the labour cost was EUR
6.6 million (3 months 2015: EUR 6.3 million), which has increased by 6.1% compared to the same period previous year.
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
24
ETHICAL BUSINESS PRACTICES Merko’s core values include ethical business practices, which is an important success factor in the long run. By following highly
ethical policies, we promote profitable growth, gain the trust of our stakeholders and support fair competition and equal
treatment. Unethical business practices carry serious consequences - including hindering the functioning of a fair market and
distorting competition.
The AS Merko Ehitus group does not tolerate any form of corruption. We have undertaken the obligation to engage in honest
business and to be in compliance with anti-corruption laws in each country where we operate. We are guided by ethical principles
in our actions. We make sure that our employees know these principles and adhere to them in their work. In order to facilitate this,
the group has enacted a Code of Business Ethics.
The topic of business ethics has been thoroughly covered on the group’s website http://group.merko.ee/en/corporate-
governance-2/responsibility/ethical-business-practices/. As a new feature all employees, partners and customers can report
clear or potential unethical conduct via various anonymous channels, to which the http://group.merko.ee/en/corporate-
governance-2/responsibility/reporting-channels/ website provides an overview. Each reported misconduct will be investigated
by an independent cooperation partner, and will lead to appropriate action.
RECOGNITIONS 2016 In 2016, the activities of AS Merko Ehituse have been recognised in the form of the following prizes:
BALTIC MARKET AWARD 2015
At an award gala held in the first quarter of 2016 – the Baltic Market Awards 2015 - NASDAQ Baltic
stock exchanges announced the companies of the year with the best investor relations. The goal of
the competition was to raise the general level of investor relations among listed companies by
recognizing the ones that stood out during the year with first-class investor relations. In 2015, the
publicly listed companies received awards in five categories; in addition, the year’s best stock
exchange member was selected. AS Merko Ehitus received third place in the main category “The
Best Investor Relations in the Baltic Countries” for the second year in a row and second place in the
category “The Best Annual and Corporate Governance Report”.
CHIEF FINANCIAL OFFICER OF THE YEAR 2016
Each year, under the auspices of Äripäev business daily, Estonia’s best financial director is selected at the BIG4 finance conference.
From several dozen candidates, the jury selected five nominees. 2016's candidates included also AS Merko Ehitus Group CFO Signe
Kukin. The jury consisted of the representatives of four major audit firms – AS PricewaterhouseCoopers, Deloitte Audit Eesti AS,
KPMG Baltics OÜ and Ernst & Young Baltic AS, and a representative from Äripäev.
The jury credited Signe Kukin for her key role in making Merko’s reporting system more effective, speeding up significantly the
availability of financial information both for regulative purposes and management reports. Signe Kukin has also led the
introduction of many changes in the group’s structure, making it more tax-efficient.
CIVIL ENGINEER OF THE YEAR 2015
Roland Vaikmäe, project manager with AS Merko Ehitus Eesti, was declared the winner of the Civil Engineer of the Year 2015
competition held announced by the Estonian Association of Civil Engineers in the first quarter of 2016. The victory was an
acknowledgement of Roland Vaikmäe’s successful management of the reconstruction of the large-scale and complex Water
treatment plant of City of Narva as a civil engineer. The competition is aimed at promoting the profession of a civil engineer, and
acknowledging the engineers engaged in the field of construction for outstanding professional achievements.
BEST INSTALLER OF ASPHALT PAVEMENT 2015
At the Road Administration annual conference held in Q2 2016, the work of Tallinna Teede AS was recognized with the first
awarding of the title “Best Installer of Asphalt Pavements 2015”. The winner was elected based on adherence to deadlines, the
quality achieved, deductions made, communication with the customer, timely and complete submission of documents and
supervision decision.
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
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SHARE AND SHAREHOLDERS
INFORMATION ON SECURITY
Issuer AS Merko Ehitus
Name of security Share of Merko Ehitus
Ticker MRK1T
Residency of issuer Estonia
Stock Exchange List NASDAQ Tallinn, Baltic Main List
Industry Construction
ISIN EE3100098328
Nominal value without nominal value
Number of securities 17,700,000
Volume of issue 12,000,000
Currency EUR
Listing date 11.08.2008
The shares of Merko Ehitus are listed in the Main List of NASDAQ Tallinn. As at 31 March 2016, the company has 17,700,000 shares.
The number of shares has not changed during 2016.
A total of 663 transactions were conducted with the shares of Merko Ehitus in 3 months of 2016, with 0.16 million shares (0.9% of
total shares) traded, generating a turnover of EUR 1.33 million (comparable figures in 3 months 2015 were accordingly: 668
transactions with 0.32 million shares traded (1.8% of total shares) and generating a turnover of EUR 2.71 million). The lowest share
price amounted to EUR 7.06 and the highest to EUR 9.14 per share (3 months of 2015: EUR 6.70 and EUR 9.39). The closing price of
the share was EUR 9.00 on 31 March 2016 (31.03.2015: EUR 9.01; 31.12.2015: EUR 8.48). As at 31 March 2016, the market value of AS
Merko Ehitus amounted to EUR 159.3 million, which has decreased by 0.1% compared to the same period end last year (31.03.2015:
EUR 159.5 million; 31.12.2015: EUR 150.1 million).
31.03.2016 31.03.2015 31.03.2014 31.12.2015
Number of shares 17,700,000 17,700,000 17,700,000 17,700,000
Earnings per share (EPS), euros 0.01 0.05 0.04 0.53
Equity per share, euros 6.99 7.01 6.77 7.02
P/B ratio 1.29 1.29 1.14 1.21
P/E ratio 17.13 12.74 14.68 15.01
Market value, million EUR 150.1 159.5 137.2 150.1
CHANGE IN THE PRICE AND TRANSACTION VOLUME OF MERKO EHITUS SHARE AT NASDAQ TALLINN STOCK EXCHANGE IN 2016
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
26
STRUCTURE OF SHAREHOLDERS ACCORDING TO NUMBER OF SHARES AS AT 31.12.2016
NUMBER OF SHARES NUMBER OF
SHAREHOLDERS
% OF
SHAREHOLDERS
NUMBER OF
SHARES
% OF
SHARES
1,000,001 - … 1 0.06% 12,742,686 71.99%
100,001 – 1,000,000 10 0.58% 2,848,588 16.09%
10,001 – 100,000 36 2.09% 1,017,863 5.75%
1,001-10,000 250 14.50% 713,542 4.03%
101-1,000 874 50.69% 347,598 1.97%
1-100 553 32.08% 29,723 0.17%
Total 1,724 100% 17,700,000 100%
SHAREHOLDERS OF AS MERKO EHITUS AS AT 31.03.2016 AND CHANGE COMPARED TO THE PREVIOUS QUARTER
NUMBER OF
SHARES
% OF TOTAL
31.03.2016
% OF TOTAL
31.12.2015 CHANGE
AS Riverito 12,742,686 71.99% 71.99% -
ING Luxembourg S.A. AIF Account 974,126 5.50% 5.50% -
Firebird Republics Fund Ltd 395,704 2.24% 2.24% -
Skandinaviska Enskilda Banken AB, Swedish customers 261,701 1.48% 1.45% +5,048
SEB S.A. UCITS client assets 261,222 1.48% 1.48% -
Firebird Avrora Fund Ltd 220,519 1.25% 1.25% -
Skandinaviska Enskilda Banken AB, Finnish customers 165,026 0.93% 0.95% -2,940
State Street Bank and Trust Omnibus Account a Fund No OM01 153,018 0.86% 0.86% -
SEB Elu- ja Pensionikindlustus AS 145,020 0.82% 0.82% -
Clearstream Banking Luxembourg S.A. customers 141,954 0.80% 0.80% +245
Total largest shareholders 15,460,976 87.35% 87.34% +2,353
Total other shareholders 2,239,024 12.65% 12.66% -2,353
Total 17,700,000 100% 100% -
PERFORMANCE OF THE SHARE OF MERKO EHITUS AND COMPARISON INDEX OMX TALLINN IN 2016
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
27
DIVIDENDS AND DIVIDEND POLICY The distribution of dividends to the shareholders of the company is recorded as a liability in the financial statements as of the
moment when the payment of dividends is approved by the company’s shareholders.
At the meeting held on 8 April 2013, the Management Board and Supervisory Board of AS Merko Ehitus reviewed the company’s
strategic development trends and approved the long-term financial objectives until 2018, under which a new objective of paying
the shareholders 50-70% of the annual profit as dividends was established. The achievement of this objective is an important
priority for the group.
The annual general meeting of shareholders of AS Merko Ehitus held at 27 April 2016 approved the Supervisory Board’s proposal to
pay the shareholders the total amount of EUR 9.0 million (EUR 0.51 per share) as dividends from net profit brought forward, which
is equivalent to a 90% dividend rate and a 6.0% dividend yield for the year 2015 (using the share price as at 31 December 2015),
(comparable figures in 2015 were accordingly: EUR 7.3 million (EUR 0.41 per share) as dividends, which is equivalent to a 58%
dividend rate and a 5.7% dividend yield (using the share price as at 31 December 2014)).
According to the Estonian Income Tax Law §50 section 11 AS Merko Ehitus can pay certain portion of dividends without any
additional income tax expense and liabilities occurring due to previously received and taxed distribution of profits from
subsidiaries. Taking into account the dividends already paid to the parent company by the subsidiaries during 2016, the group will
incur additional income tax expense in connection with the disbursement of dividends of approximately EUR 0.7 million (2015: EUR
0.9 million) in Estonia in the second quarter of 2016.The dividend payment to the shareholders will take place on 20 May 2016.
In the past five years, the shareholders have received dividends
from the net profit of the accounting year as follows:
* Using share price as at 31.12
Dividend payments are carried out in the next fiscal year in accordance with the decisions of the general meeting of the
shareholders, regarding the previous fiscal year.
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
28
CORPORATE GOVERNANCE
CORPORATE GOVERNANCE AND STRUCTURE
AS Merko Ehitus operates as a holding company whose companies in Estonia, Latvia and Lithuania offer complete solutions in the
field of construction and real estate development. In the construction sector, the group’s largest companies are AS Merko Ehitus
Eesti (100%), SIA Merks (100%), UAB Merko Statyba (100%) and the companies belonging to the AS Merko Ehitus Eesti group:
Tallinna Teede AS (100%) and AS Merko Infra (100%).
The main activity of the holding company is development and implementation of the strategies of Merko Ehitus group’s separate
business areas primarily through long-term planning of resources. The holding company AS Merko Ehitus has a two-member
Management Board: Andres Trink and Tõnu Toomik.
The profiles of the members of the Management Board and Supervisory Board have been presented in pages 29-31 and Note 16 of
the consolidated financial statements, and published, together with the track record and photographs, on the company’s website
at group.merko.ee.
It is important to maintain a simple organisational structure in the group and in management to be guided primarily by the group's
objectives and requirements. For the purposes of maximum efficiency in the group management, we in some cases differentiate
the management structure and legal structure. The groups management is carried out on a country basis. The groups country and
business area detailed management structure as at 31 March 2016 is the following:
GROUP'S LEGAL STRUCTURE
As at 31 March 2016, the group comprises 46 companies (31.03.2015: 47; 31.12.2015: 43). The group's legal structure is
predominantly based on tax efficiency and there is not in all cases a direct linear relationship with the group's effective
management structure. The detailed list of group companies is provided in Notes 16 of the financial statements.
Changes in the legal structure of the group
The 100% subsidiary in the Kingdom of Norway, Merko Investments AS (registry code 916 750 323) was founded in February 2016
and, on 17 February, entered into the register. Merko Investments AS, registered in Norway, is 100% subsidiary of AS Merko Ehitus.
The first contribution of NOK 30 thousand was made to the new subsidiary’s share capital on 3 February; the second contribution,
of NOK 4,700 thousand, was made on 3 March (totalling approximately EUR 502 thousand). This is a technical step aimed at
creating the legal platform for launching operations in Norway.
On 7 March 2016, Merko Investments AS, part of AS Merko Ehitus group, signed contracts with Norwegian companies SDV Holding
AS and Aucon AS to acquire 56% stake in Norwegian construction company Peritus Entreprenør AS. The total purchase price was
NOK 4,000 thousand (EUR 425 thousand). At the moment of purchase, the group developed an additional non-controlling stake in
the amount EUR 273 thousand. Peritus Entreprenør AS (www.peritus-entreprenor.no) is a Norwegian construction company,
offering general construction services, with the sales turnover of approximately 7 million euros in 2015. The former owners will
continue to participate in the daily management of the company and they keep their 44% stake. The objective of the acquisition is
to start offering construction services on Norwegian market.
On 7 March 2016, Merko Ehitus group subsidiary UAB Merko Bustas entered into an agreement with the company Venturecorp
Property Holdings Ltd for acquiring a 100% ownership in the Lithuanian real estate developer UAB Rinktinės projektai with a total
purchase price of EUR 2 thousand.
On 30 March 2016, AS Merko Ehitus’s 100% subsidiary AS Merko Ehitus Eesti made a non-monetary contribution into subsidiary OÜ
Fort Ehitus. The object of the non-monetary contribution was the ceding of claims arising from a loan agreement to OÜ Fort Ehitus
totalling EUR 1,880 thousand. Among other things, AS Merko Ehitus ceded claims worth EUR 1,429 thousand and the non-
AS MERKO EHITUS
ESTONIA
GENERAL CONSTRUCTION
CIVIL ENGINEERING
RESIDENTIAL DEVELOPMENT
AND CONSTRUCTION
ROAD CONSTRUCTION
LATVIA
GENERAL CONSTRUCTION
CIVIL ENGINEERING
RESIDENTIAL DEVELOPMENT
AND CONSTRUCTION
LITHUANIA
GENERAL CONSTRUCTION
RESIDENTIAL DEVELOPMENT
AND CONSTRUCTION
NORWAY
GENERAL CONSTRUCTION
REAL ESTATE DEVELOPMENT AND
INVESTMENT
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
29
controlling interest in the amount of EUR 451 thousand. After executing the transaction, AS Merko Ehitus Eesti’s stake in the
subsidiary OÜ Fort Ehitus increased by 1% percentage to 76%.
GENERAL MEETING OF SHAREHOLDERS
The Company’s highest governing body is the General Meeting of Shareholders, the authorities of which are regulated by
legislation and the articles of association of the Company.
The general meeting of the shareholders was held on 27 April 2016. The general meeting resolved to approve the annual report
and the profit allocation proposal for 2015. The dividends in the sum of EUR 9.0 million (EUR 0.51 per share) will be paid out to the
shareholders on 20 May 2016.
In addition, it was decided at the general meeting of the shareholders to amend the articles of association. The articles of
association were amended to enable electronic voting and web transmission of the general meeting, as well as for better
organisation of management of AS Merko Ehitus.
The Management Board made a presentation on the company's financial results and future prospects.
In accordance with the Commercial Code, its Articles of Association and Good Governance Code, AS Merko Ehitus calls the annual
and extraordinary general meeting of shareholders by notifying the shareholders through the Tallinn Stock Exchange and by
publishing a meeting call in one national daily newspaper at least 3 weeks in advance. The general meeting shall be held at the
place shown in the notice, on a working day and between 9 a.m. and 6 p.m., enabling most of the shareholders to participate in the
General Meeting of Shareholders.
Before their publication, agendas at annual and extraordinary general meetings of the company’s shareholders are approved by
the Supervisory Board that shall also present to the general meeting subjects for discussion and voting. Agenda items of the
general meeting, recommendations of the Supervisory Board with relevant explanations, procedural guidance for participation in
the general meeting and how and when new agenda items can be proposed are published together with the notice on calling the
general meeting.
General meetings can be attended by any shareholder or his or her authorised representative. AS Merko Ehitus does not allow
participation in general meetings by electronic means of communication equipment since the deployment of reliable solutions for
the identification of shareholders some of whom live abroad, while ensuring the privacy of participating shareholders, would be
too complicated and costly. No picture taking or filming is allowed at the general meeting, because it may disturb the privacy of
shareholders.
Annual and extraordinary general meeting of shareholders shall be chaired by an independent person. In 2016, the general meeting
was chaired by attorney-at-law Vesse Võhma who introduced the procedure for conducting the general meeting and the
procedure of asking questions from the Management Board and Supervisory Board about the company’s activities.
On behalf of the company, usually the Chairman of the Management Board and the Chairman of the Supervisory Board shall
participate in the General Meeting of AS Merko Ehitus, and if necessary, other members of the Management and Supervisory
Boards shall be involved. If necessary, the company’s auditor shall participate.
The annual general meeting of shareholders of AS Merko Ehitus held in 2016 was attended by Andres Trink (Chairman of the
Management Board), Tõnu Toomik (Member of the Management Board), Signe Kukin (Group Chief Financial Officer) and Ago Vilu
(Auditor).
SUPERVISORY BOARD
The Supervisory Board shall plan the activities of the company, organise the management of the company and supervise the
activities of the Management Board. The Supervisory Board shall notify the general meeting of shareholders of the results of a
review. The Chairman of the Supervisory Board organises the work of the Supervisory Board. The main duties of the Supervisory
Board are to approve the group's material strategic and tactical decisions and to supervise the activities of the group's
Management Board. The Supervisory Board's actions are guided by the company's articles of association, guidelines of the general
meeting and law.
According to the Articles of Association of Merko Ehitus, the Supervisory Board has 3 to 5 members who shall be elected for the
term of three years.
At the annual general meeting of shareholders held at 30 April 2014, it was decided to extend the term of office of Supervisory
Board members Toomas Annus, Teet Roopalu, Indrek Neivelt and Olari Taal until 30 April 2017, i.e. for three years from the decision
of the extension.
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
30
The Supervisory Board of AS Merko Ehitus has four members of whom, in accordance with the requirements of the Good
Governance Code, two - Indrek Neivelt and Olari Taal - are independent members:
Toomas Annus (55) Chairman of the Supervisory
Board
Teet Roopalu (66) Member of the Supervisory Board
Positions held:
2011-… AS Merko Ehitus, Chairman of the Supervisory Board
2014-… E.L.L. Kinnisvara AS, Chairman of the Supervisory
Board
2009-2014 E.L.L. Kinnisvara AS, Member of the Management
Board
2008-… AS Järvevana, Chairman of the Management Board
1999-2009 E.L.L. Kinnisvara AS, Chairman of the Supervisory
Board
1997-2008 AS Merko Ehitus, Chairman of the Supervisory Board
1996-… AS Riverito, Chairman of the Management Board
1991-1996 AS EKE Merko, Chairman of the Management Board
1989-1991 EKE MRK, director of the company
Education:
Tallinn University of Technology, industrial and civil engineering
Tallinn Technical School of Building and Mechanics, industrial and
civil engineering
Number of shares: 8,322,914 (AS Riverito)
Positions held:
2004-… AS Merko Ehitus, Member of the Supervisory Board
2010-… AS Riverito, Member of the Management Board
2003-… E.L.L. Kinnisvara AS, Member of the Supervisory Board
2008-… AS Järvevana, Member of the Supervisory Board
2002-2004 AS Merko Ehitus, Adviser to the Management Board
Has worked for different construction companies, including as a
director of finance. Has been in charge of economic activities in
the EKE system as a chief economist; worked as a bank director;
and has also worked in building design.
Member of Supervisory Boards of group subsidiaries
Education:
Tallinn University of Technology, construction economics and
organisation
Number of shares: -
Indrek Neivelt (49) Member of the Supervisory Board Olari Taal (62) Member of the Supervisory Board
Positions held:
2008-… AS Merko Ehitus, Member of the Supervisory Board
2015-… AS Pocopay, Member of the Management Board
Has held various executive positions in Hansapank (now
Swedbank), incl. Director General of the Group, Chairman of the
Management Board and also in Bank Saint Petersburg as the
Chairman of the Supervisory Board.
Belongs to Supervisory Boards of various companies.
Education:
Tallinn University of Technology, civil engineering economics and
management.
Stockholm University, banking and finance, MBA
Number of shares: 31,635 (Trust IN OÜ)
Positions held:
2008-… AS Merko Ehitus, Member of the Supervisory Board
Has been the head of the Tartu Elamuehituskombinaat (Tartu
Housing Plant; Tartu Maja) and Eesti Hoiupank (Estonian Savings
Bank).
Has served the Republic of Estonia as Minister of Construction,
Minister of Economic Affairs, Minister of the Interior and as a
Member of the 10th Riigikogu (Parliament of Estonia).
Belongs to Supervisory Boards of various companies.
Education:
Tallinn University of Technology, civil engineering.
Number of shares: 2,500 (Eggera OÜ)
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
31
MANAGEMENT BOARD
The Management Board is a governing body which represents and manages AS Merko Ehitus in its daily activities in accordance
with the law and the Articles of Association. The Management Board has to act in the most economically purposeful manner,
taking into consideration the best interests of all shareholders and ensures the company’s sustainable development in accordance
with set objectives and strategy. To ensure that the company’s interests are met in the best way possible, the Management and
Supervisory Boards shall extensively collaborate. At least once a month, a joint meeting of the members of the Supervisory and
Management Boards shall take place, in which the Management Board shall inform the Supervisory Board of significant issues
regarding the company’s business operations, the fulfilment of the company’s short and long-term goals and the risks impacting
them. For every meeting of the Supervisory Board, the Management Board shall prepare a management report and submit it well
in advance of the meeting so that the Supervisory Board can study it. The Management Board prepares reports for the Supervisory
Board also in between the meetings, if it is considered necessary by the Supervisory Board or its Chairman.
Pursuant to the Articles of Association approved at the general meeting of shareholders in 2012, the Management Board may have
up to three members.
The Management Board AS of AS Merko Ehitus has two members: Andres Trink (Chairman of the Management Board) and Tõnu
Toomik (Member of the Management Board).
Andres Trink (49) Chairman of the Management
Board Appointed: 1 January 2012
Term ends: 1 January 2018
Tõnu Toomik (55) Member of the Management Board Appointed: 6 June 2013
Term ends: 6 June 2019
Positions held:
2012-… AS Merko Ehitus, Chairman of the Management Board
Chairman of the Supervisory Board of Merko Ehitus Eesti AS, SIA
Merks and UAB Merko Statyba
Has held various executive positions in the private and public
sector. Before being hired at Merko Ehitus, worked for 15 years in
the financial sector, including as a Member of the Management
Board of Baltic banking at Hansapank (now Swedbank).
Education:
Tallinn University of Technology, automated management
systems specialty (summa cum laude).
Estonian Business School, international business administration.
Graduate of the INSEAD University (France), executive
management programme.
Number of shares: 300
Positions held:
2013-… AS Merko Ehitus, Member of the Management Board
2014-… E.L.L. Kinnisvara AS, Member of the Supervisory Board
2011-2013 AS Merko Ehitus, Member of the Supervisory Board
2009-2014 E.L.L. Kinnisvara AS, Chairman of the Supervisory
Board
2008-2011 AS Merko Ehitus, Chairman of the Supervisory Board
2008-… AS Järvevana, Chairman of the Supervisory Board
1999-2009 E.L.L. Kinnisvara AS, Member of the Supervisory Board
1997-1999 E.L.L. Kinnisvara AS, Chairman of the Supervisory
Board
1997-2008 AS Merko Ehitus, Chairman of the Management Board
1996-… AS Riverito, Member of the Management Board
1993-1996 AS EME Merko, Estonian Regional Director
1993-1993 AS EKE Merko, Project Manager
Member of the Supervisory Board of Merko Ehitus Eesti AS, SIA
Merks and UAB Merko Statyba
Education:
Tallinn University of Technology, industrial and civil engineering
Number of shares: 1,607,185 (AS Riverito)
The responsibilities of Andres Trink, Chairman of the Management Board, include, among others, fulfilling daily obligations of the
CEO of AS Merko Ehitus, managing and representing the company, ensuring compliance with the Articles of Association, legal acts,
organising the work of the Management Board and supervisory boards of the more important subsidiaries, coordinating the
development of strategies and providing for their implementation, being responsible for business development and finance. Tõnu
Toomik is responsible for the management of the portfolio of properties and coordination of construction segment development
activities across the whole group.
Changes in the management of AS Merko Ehitus
On 3 May 2016, the Supervisory Board of AS Merko Ehitus decided to extend the powers of the Member of the Management Board,
Mr. Tõnu Toomik for three years, i.e. from 6 June 2016 until 6 June 2019. The Management Board of AS Merko Ehitus will continue
with current two members: Mr. Andres Trink (The Chairman) and Mr. Tõnu Toomik.
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
32
SUPERVISORY AND MANAGEMENT BOARDS OF SUBSIDIARIES
Authorisation and responsibility of supervisory boards of subsidiaries of AS Merko Ehitus are based on their Articles of Association
and intergroup rules. Generally, Supervisory Boards of subsidiaries consist of members of the Management Board and Supervisory
Board of the company that is the main shareholder of the specific subsidiary. Supervisory Board meetings of the most significant
subsidiaries are held usually once a month, otherwise according to the group’s needs, Articles of Association of subsidiaries and
legal provisions. Generally, no separate fee is paid to members of the Supervisory Board of subsidiaries. Members of the
Supervisory Board will also receive no termination benefit in case their contract of service is terminated before due date or not
extended
The chairman or member of the Management Board of the subsidiary shall be named by the subsidiary’s Supervisory Board. Below
are the supervisory boards and management boards of the most significant subsidiaries that are wholly-owned by AS Merko
Ehitus as at 31 March 2016:
COMPANY SUPERVISORY BOARD MANAGEMENT BOARD
AS Merko Ehitus Eesti Andres Trink (Chairman), Teet Roopalu,
Tõnu Toomik
Tiit Roben (Chairman), Jaan Mäe, Alar
Lagus, Veljo Viitmann
AS Merko Infra Tiit Roben (Chairman), Veljo Viitmann,
Mihkel Mugur
Arno Elias (Chairman), Tarmo Pohlak,
Boris Tehnikov
Tallinna Teede AS Tiit Roben (Chairman), Alar Lagus, Veljo
Viitmann Jüri Läll (Chairman), Jüri Helila
OÜ Merko Investments - Andres Trink, Signe Kukin
SIA Merks Andres Trink (Chairman), Tõnu Toomik,
Signe Kukin
Oskars Ozoliņš (Chairman), Jānis
Šperbergs
SIA Merko Investments - Andres Trink (Chairman), Oskars Ozoliņš
UAB Merko Statyba Andres Trink (Chairman), Tõnu Toomik,
Signe Kukin
Saulius Putrimas (Chairman), Jaanus
Rästas
OÜ Metsailu - Tiit Kuusik, Ines Prual
Changes in the management of group subsidiaries
On 21 January 2016, the Supervisory Board of SIA Merks – part of AS Merko Ehitus group – decided to extend the powers of the
Members of the Management Board, Mr. Oskars Ozoliņš and Mr. Janis Šperbergs for three years, i.e. from 2 February 2016 till 1
February 2019. The Management Board of SIA Merks will continue in a former two-member panel: Mr. Oskars Ozoliņš (The
Chairman) and Mr. Janis Šperbergs.
On 10 March 2016, the Management Board of AS Merko Ehitus decided to change the composition of the Supervisory Board of AS
Merko Ehitus Eesti, part of AS Merko Ehitus group. Mr. Toomas Aak will leave the Supervisory Board of AS Merko Ehitus Eesti and
the Supervisory Board will continue with three members: Mr. Andres Trink (The Chairman), Mr. Tõnu Toomik and Mr. Teet Roopalu.
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
33
DEFINITION OF RATIOS
Gross profit margin (%) = Gross profit
Revenue
Operating profit margin (%) = Operating profit
Revenue
EBT margin (%) = Earnings before tax
Revenue
Net profit margin (%) = Net profit (attributable to equity holders of the parent)
Revenue
Return on equity, ROE (%) = Net profit (attributable to equity holders of the parent) of the current 4 quarters
Shareholders equity (average of the current 4 quarters)
Return on assets, ROA (%) = Net profit (attributable to equity holders of the parent) of the current 4 quarters
Total assets (average of the current 4 quarters)
Return on invested capital, ROIC (%) = (Profit before tax + interest expense - foreign exchange gain (loss) + other financial income) of the current 4 quarters
(Shareholders equity (average) + interest-bearing liabilities (average)) of the current 4 quarters
Equity ratio (%) = Shareholders equity
Total assets
Debt ratio (%) = Interest-bearing liabilities
Total assets
Current ratio = Current assets
Current liabilities
Quick ratio = Current assets - inventories
Current liabilities
Accounts receivable turnover(days) = Trade receivables of the current 4 quarters (average) x 365
Revenue of the current 4 quarters
Accounts payable turnover (days) = Payables to suppliers of the current 4 quarters (average) x 365
Cost of goods sold of the current 4 quarters
EBITDA (million EUR) = Operating profit + depreciation
EBITDA margin (%) = Operating profit + depreciation
Revenue
General expense ratio (%) = Marketing expenses + General and administrative expenses
Revenue
Labour cost ratio (%) = Labour costs
Revenue
Revenue per employee (EUR) = Revenue
Number of employees (average)
Earnings per share, EPS (EUR) = Net profit (attributable to equity holders of the parent)
Number of shares
Equity/share (EUR) = Shareholders equity (average of the current 4 quarters)
Number of shares
Dividend per share (EUR) = Payable dividends
Number of shares
Dividend rate (%) = Payable dividends x 100
Net profit (attributable to equity holders of the parent)
Dividend yield (%) = Dividends payable per share
Share price 31.12
P/E = Share price 31.03
Earnings per share of the current 4 quarters
P/B = Share price 31.03
Equity per share (average of the current 4 quarters)
Market capitalisation = Share price 31.03 x Number of shares
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
34
MANAGEMENT BOARD'S DECLARATION TO THE MANAGEMENT
REPORT
The Management Board of AS Merko Ehitus declares and confirms that the interim financial statements provide, to the best of the
knowledge of the Management Board, a true and fair view of the development, results and financial position of the company and
the consolidated undertakings as a whole, include a description of the principal risks and uncertainties, and reflect transactions
with related parties.
Andres Trink Chairman of the Management Board 05.05.2016
Tõnu Toomik Member of the Management Board 05.05.2016
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
35
CONSOLIDATED FINANCIAL STATEMENT
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME unaudited
in thousand euros
Note 2016
3 months
2015
3 months
2015
12 months
Revenue 2 46,820 45,599 251,012
Cost of goods sold 3 (43,758) (42,038) (228,044)
Gross profit 3,062 3,561 22,968
Marketing expenses (768) (779) (3,230)
General and administrative expenses (2,417) (2,193) (8,907)
Other operating income 648 428 1,943
Other operating expenses (42) (17) (278)
Operating profit 483 1,000 12,496
Finance income/costs (180) (164) (804)
incl. finance income/costs from joint ventures (17) (44) (138)
finance income/costs from other long-term investments - - 3
interest expense (156) (150) (756)
foreign exchange gain (loss) (8) 3 (3)
other financial income (expenses) 1 27 90
Profit before tax 303 836 11,692
Corporate income tax expense (274) (95) (1,857)
Net profit for financial year 29 741 9,835
incl. net profit attributable to equity holders of the parent 112 809 10,000
net profit attributable to non-controlling interest (83) (68) (165)
Other comprehensive income
Currency translation differences of foreign entities (2) (2) 2
Comprehensive income for the period 27 739 9,837
incl. net profit attributable to equity holders of the parent 110 807 10,002
net profit attributable to non-controlling interest (83) (68) (165)
Earnings per share for profit attributable to equity holders of the
parent (basic and diluted, in EUR) 4 0.01 0.05 0.56
The notes set out on pages 39-52 are an integral part of these consolidated financial statements
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
36
CONSOLIDATED STATEMENT OF FINANCIAL POSITION unaudited
in thousand euros
Note 31.03.2016 31.03.2015 31.12.2015
ASSETS
Current assets
Cash and cash equivalents 5 34,400 40,912 39,905
Trade and other receivables 6 24,947 43,587 24,854
Prepaid corporate income tax 543 26 421
Inventories 7 102,532 123,222 109,090
162,422 207,747 174,270
Non-current assets
Long-term financial assets 8 19,506 11,425 16,703
Deferred income tax assets 1,423 1,580 1,423
Investment property 9 4,309 4,557 4,371
Property, plant and equipment 10 13,375 14,614 13,442
Intangible assets 11 948 907 879
39,561 33,083 36,818
TOTAL ASSETS 201,983 240,830 211,088
LIABILITIES
Current liabilities
Borrowings 12 3,119 11,516 5,525
Payables and prepayments 13 38,360 62,932 43,266
Income tax liability 1,021 478 711
Short-term provisions 14 4,764 4,889 5,013
47,264 79,815 54,515
Non-current liabilities
Long-term borrowings 12 23,035 23,600 25,660
Deferred income tax liability 978 751 788
Other long-term payables 15 989 4,442 1,159
25,002 28,793 27,607
TOTAL LIABILITIES 72,266 108,608 82,122
EQUITY
Non-controlling interests 3,928 4,388 3,268
Equity attributable to equity holders of the parent
Share capital 7929 12,000 7929
Statutory reserve capital 1,200 1,200 1,200
Currency translation differences (665) (667) (663)
Retained earnings 117,325 115,301 117,232
125,789 127,834 125,698
TOTAL EQUITY 129,717 132,222 128,966
TOTAL LIABILITIES AND EQUITY 201,983 240,830 211,088
The notes set out on pages 39-52 are an integral part of these consolidated financial statements.
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
37
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY unaudited
in thousand euros
Equity attributable to equity holders of the parent Non-
control-
ling
interest
Total
Share
capital
Statutory
reserve
capital
Currency
translation
differences
Retained
earnings
Total
Balance as at 31.12.2014 12,000 1,200 (665) 114,492 127,027 4,455 131,482
Profit (loss) for the reporting
period - - - 809 809 (68) 741
Other comprehensive income - - (2) - (2) - (2)
Total comprehensive income
(loss) for the reporting period - - (2) 809 807 (68) 739
Issuance of additional share
capital - - - 1 1
Total transactions with owners - - - - - 1 1
Balance as at 31.03.2015 12,000 1,200 (667) 115,301 127,834 4,388 132,222
Balance as at 31.12.2015 7,929 1,200 (663) 117,232 125,698 3,268 128,966
Profit (loss) for the reporting
period - - - 112 112 (83) 29
Other comprehensive income - - (2) - (2) - (2)
Total comprehensive income
(loss) for the reporting period - - (2) 112 110 (83) 27
Increase of share capital by non-
monetary contribution and
acquisition of minority interest
(Note 16)
- - - (19) (19) 470 451
Minority interest of acquired
subsidiary (Note 16) - - - - - 273 273
Total transactions with owners - - - (19) (19) 743 724
Balance as at 31.03.2016 7,929 1,200 (665) 117,325 125,789 3,928 129,717
The share capital of AS Merko Ehitus consists of 17,700,000 shares with non-par value.
The notes set out on pages 39-52 are an integral part of these consolidated financial statements.
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
38
CONSOLIDATED CASH FLOW STATEMENT unaudited
in thousand euros
Note 2016
3 months
2015
3 months
2015
12 months
Cash flows from (used in) operating activities
Operating profit 483 1,000 12,496
Adjustments:
Depreciation 702 868 3,004
(Profit)/loss from sale of non-current assets (106) (19) (114)
Change in receivables and liabilities related to construction
contracts recognised under the stage of completion method (3,536) (4,552) 2,229
Interest income from operating activities (524) (389) (1,592)
Change in provisions (2,824) (4,150) (1,487)
Change in trade and other receivables related to operating
activities 428 4,989 9,985
Change in inventories 6,574 (2,303) 10,936
Change in trade and other payables related to operating
activities (2,863) (3,473) (27,234)
Interest received 377 357 1,793
Interest paid (147) (171) (857)
Other finance income and costs (11) (7) (36)
Corporate income tax (paid)/reclaimed (148) (24) (1,754)
Total cash flows from (used in) operating activities (1,595) (7,874) 7,369
Cash flows from investing activities
Acquisition of subsidiaries 16 1,244 - -
Increase of equity in joint venture - - (355)
Purchase of investment property (4) - -
Purchase of property, plant and equipment (486) (268) (699)
Proceeds from sale of property, plant and equipment 123 56 311
Purchase of intangible assets (28) (13) (116)
Interest received 13 27 97
Total cash flows from investing activities 862 (198) (762)
Cash flows from (used in) financing activities
Proceeds from borrowings 306 876 17,115
Repayments of borrowings (4,863) (3,086) (21,846)
Finance lease principal payments (208) (390) (2,186)
Proceeds from issues of shares of subsidiaries to non-
controlling interest - 1 1
Share capital reduction - - (4,071)
Non-controlling interest buyout - - (41)
Dividends paid - - (7,257)
Total cash flows from (used in) financing activities (4,765) (2,599) (18,285)
Net increase/decrease in cash and cash equivalents (5,498) (10,671) (11,678)
Cash and cash equivalents at the beginning of the period 5 39,905 51,583 51,583
Effect of exchange rate changes (7) - -
Cash and cash equivalents at the end of the period 5 34,400 40,912 39,905
The notes set out on pages 39-52 are an integral part of these consolidated financial statements.
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
39
NOTES
NOTE 1 ACCOUNTING POLICIES USED The consolidated interim financial statements of the AS Merko Ehitus group for 3 months 2016 were prepared in accordance with
the requirements of IAS 34 “Interim Financial Reporting” for condensed interim financial statements. The interim financial
statements follow the same accounting principles and methods used in the 2015 financial statements. The accounting methods
used to prepare the interim financial statements are in conformity with the International Financial Reporting Standards as they
were adopted by the European Union. 2015 audited annual report and 2015 3 months unaudited interim report comparative figures
are presented in the present financial report.
According to the best knowledge of the Management Board, the consolidated interim financial statements for the 12 months and IV
quarter 2015 present a true and fair view of the group’s economic results based on the principle of going concern. While the
influence of seasonality of construction and the influence of the cyclical nature of development activity on the period’s results can
be considered insignificant.
NOTE 2 OPERATING SEGMENTS in thousand euros
The chief operating decision-maker, i.e. the Management Board of parent AS Merko Ehitus, monitors the business of the group by
countries and operating segments. The performance of the business is assessed by the chief operating decision-maker based on
segment revenue derived from outside the group and pre-tax profit. Pre-tax profit of segments is made up of income and
expenses directly related to them. Other income and expenses not directly related to segments cannot be allocated and they are
monitored together at the group level.
Based on internal management information, the group’s Management Board monitors activities by the following segments:
- Estonian construction service,
- Latvian and Lithuanian construction service,
- Real estate development.
Estonian construction service and Latvian and Lithuanian construction service segments include all projects of the respective
countries pertaining to construction services both in general construction, civil engineering and road construction. Other operating
areas (management services, supervision service, etc.) are insignificant to the group and they are not monitored as separate
segments. The real estate segment is primarily engaged in the group’s own real estate development – construction and sale, to a
lesser degree, it also includes real estate maintenance and leasing. The amount of each cost item in segment reporting is a figure
presented to management for making decision about allocation of resources to segments and valuation of segment operating
results. The costs that come after the profit of reporting segments are recognised in segment reporting using the same principles
as in the financial statements and they are not used for evaluation of the results of operating segments by the company’s
management.
In segment reporting, all intra-group transactions with income, expenses and assets and unrealised gains and losses between
reportable segments have been eliminated unless the loss is due to impairment.
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
40
2016 3 months Estonian
construction
service
Latvian and
Lithuanian
construction
service
Real estate
development
Total
segments
Segment revenue 19,072 8,005 25,396 52,473
Inter-segment revenue (45) (31) (5,577) (5,653)
Revenue from external clients 19,027 7,974 19,819 46,820
Gross profit (-loss) 933 312 1,817 3,062
Segment pre-tax profit (loss) 1,010 311 2,198 3,519
incl. interest income from operating activities - - 470 470
depreciation (Note 3) (484) (7) (76) (567)
impairment of inventories (Note 3) - - (132) (132)
setting up of provisions (Note 3) (143) (58) (304) (505)
loss on joint ventures - - (17) (17)
other finance income (costs) (10) - (72) (82)
incl. interest income - - 2 2
interest expenses (10) - (69) (79)
Segment assets 31.03.2016 35,543 9,161 128,664 173,368
incl. joint ventures (Note 8) - - 254 254
2015 3 months Estonian
construction
service
Latvian and
Lithuanian
construction
service
Real estate
development
Total
segments
Segment revenue 18,224 17,472 16,708 52,404
Inter-segment revenue (1,137) (34) (5,634) (6,805)
Revenue from external clients 17,087 17,438 11,074 45,599
Gross profit (-loss) 1,396 1,001 1,164 3,561
Segment pre-tax profit (loss) 1,374 1,000 1,463 3,837
incl. interest income from operating activities - - 388 388
depreciation (Note 3) (530) (8) (76) (614)
setting up of provisions (Note 3) (109) (59) (256) (424)
loss on joint ventures (16) - (28) (44)
other finance income (costs) (18) - (61) (79)
incl. interest expenses (18) - (61) (79)
Segment assets 31.03.2015 40,884 22,783 149,627 213,294
incl. joint ventures (Note 8) 3 - 20 23
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
41
2015 12 months Estonian
construction
service
Latvian and
Lithuanian
construction
service
Real estate
development
Total
segments
Segment revenue 117,983 72,155 95,528 285,666
Inter-segment revenue (9,377) (134) (25,143) (34,654)
Revenue from external clients 108,606 72,021 70,385 251,012
Gross profit (-loss) 10,389 4,831 7,748 22,968
Segment pre-tax profit (loss) 10,381 4,830 8,886 24,097
incl. interest income from operating activities - - 1,516 1,516
depreciation (Note 3) (2,010) (31) (302) (2,343)
impairment of inventories (Note 3) (1,058) (1,058)
setting up of provisions (Note 3) (919) (1,326) (876) (3,121)
loss on joint ventures (19) - (119) (138)
other finance income (costs) (63) - (253) (316)
incl. interest income - - 3 3
interest expenses (63) - (252) (315)
Segment assets 31.12.2015 31,971 8,834 133,202 174,007
incl. joint ventures (Note 8) - - 284 284
In addition to the segment assets, as at 31.03.2016 the group holds assets in the amount of EUR 28,615 thousand (31.03.2015: EUR
27,536 thousand; 31.12.2015: EUR 37,081 thousand) that cannot be associated with a specific segment or the allocation of which to
segments would be impracticable. The unallocated assets of the group comprise cash and cash equivalents, deposits, loans
receivable excluding loans to joint ventures, tax prepayments, other receivables and an unallocated portion of property, plant and
equipment.
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
42
RECONCILIATION OF THE PRE-TAX PROFIT OF SEGMENTS AND THE GROUP
in thousand euros
2016 3 months 2015 3 months 2015 12 months
Pre-tax profit from reporting segments 3,519 3,837 24,097
Unallocated income (expense)
marketing expenses (768) (779) (3,230)
general and administrative expenses (2,417) (2,193) (8,907)
incl. setting up of provisions - - (115)
cancellation of provisions - - 172
other operating income (expense) 50 12 82
incl. interest income from operating activities 54 - 76
finance income (costs) (81) (41) (350)
incl. interest income 10 36 118
interest expenses (77) (71) (441)
Total profit before tax 303 836 11,692
Unallocated finance costs and income include income from bank deposits, foreign exchange gains (losses), uncapitalised loan
interest expenses and other finance income and costs.
REVENUE BY CLIENT LOCATION
in thousand euros and percentages
2016 3 months 2015 3 months 2015 12 months
Estonia 31,343 67% 26,534 58% 154,809 62%
Latvia 9,771 21% 16,784 37% 65,226 26%
Lithuania 4,335 9% 2,281 5% 28,134 11%
Finland 809 2% - - 2,843 1%
Norway 562 1% - - - -
Total 46,820 100% 45,599 100% 251,012 100%
NON-CURRENT ASSETS (EXCEPT FOR FINANCIAL ASSETS AND DEFERRED INCOME TAX ASSETS) BY LOCATION OF ASSETS
in thousand euros
31.03.2016 31.03.2015 31.12.2015
Estonia 18,007 19,513 18,200
Latvia 486 539 473
Lithuania 15 26 19
Norway 124 - -
Total 18,632 20,078 18,692
NOTE 3 COST OF GOODS SOLD in thousand euros
2016 3 months 2015 3 months 2015 12 months
Construction services and properties purchased for resale 27,845 26,519 142,961
Materials 6,385 6,440 35,382
Labour costs 4,601 4,363 22,514
Construction mechanisms and transport 1,314 1,354 9,079
Design 651 430 2,158
Real estate management costs 70 65 227
Depreciation 567 614 2,343
Impairment of inventories 132 - 1,058
Provisions 505 424 3,121
Other expenses 1,688 1,829 9,201
Total cost of goods sold 43,758 42,038 228,044
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
43
NOTE 4 EARNINGS AND DIVIDENDS PER SHARE Basic earnings per share for profit attributable to equity holders of the parent have been derived by dividing the net profit
attributable to shareholders by the weighted average number of shares.
2016 3 months 2015 3 months 2015 12 months
Net profit(-loss) attributable to shareholders (in thousand EUR) 112 809 10,000
Weighted average number of ordinary shares (thousand pcs) 17,700 17,700 17,700
Earnings (loss) per share (in euros) 0.01 0.05 0.56
The group did not have any potential ordinary shares to be issued; therefore the diluted earnings per share equal the basic
earnings per share.
Dividends payable are recognised after the approval of profit allocation at the general meeting of shareholders. In accordance with
the profit allocation decision, dividends will be paid by parent company AS Merko Ehitus in Q2 2016 in the amount of EUR 9,027
thousand, i.e. EUR 0.51 per share, and the accompanying income tax liability would amount to 20/80 on the amount to be paid out,
i.e. EUR 2,257 thousand, which will be partially covered by the income tax withheld on taxed dividends received from subsidiaries in
the previous periods. In the second quarter of 2016 the group will incur additional income tax expenses of EUR 677 thousand in
Estonia in connection with disbursement of dividends.
In 2015 the parent company AS Merko Ehitus distributed dividends in the amount of EUR 7,257 thousand, i.e. EUR 0.41 per share. AS
Merko Ehitus had to pay additional corporate income tax in Estonia in connection with the disbursement of dividends of EUR 906
thousand.
As at 31.03.2016, the parent company AS Merko Ehitus has EUR 1,395 thousand (31.03.2015: EUR 2,384 thousand; 31.12.2015: EUR 0
thousand) in dividends received from subsidiaries in previous periods and income from abroad, on which the income tax has been
withheld.
As at 31.03.2016, it is possible to pay out dividends to shareholders from retained earnings in the amount of EUR 93,607 thousand
(31.03.2015: EUR 92,185 thousand; 31.12.2015: EUR 93,255 thousand). Considering the taxed dividends received and income tax
withheld on foreign income totalling EUR 349 thousand (31.03.2015: EUR 596 thousand; 31.12.2015: EUR 0 thousand), the
corresponding income tax on dividends would amount to EUR 23,053 thousand (31.03.2015: EUR 22,450 thousand; 31.12.2015: EUR
23,314 thousand). For calculating the additional income tax on dividends, the income tax rate in force in 2016 was used, which is
20/80 of the amount paid as net dividends. The income tax related to disbursement of dividends is recognised as a liability and
income tax expense upon the announcement of dividends.
NOTE 5 CASH AND CASH EQUIVALENTS in thousand euros
31.03.2016 31.03.2015 31.12.2015
Cash on hand 2 9 4
Bank accounts 28,153 30,891 32,667
Overnight deposits 6,245 10,012 7,234
Total cash and cash equivalents 34,400 40,912 39,905
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
44
NOTE 6 TRADE AND OTHER RECEIVABLES in thousand euros
31.03.2016 31.03.2015 31.12.2015
Trade receivables
Accounts receivable 13,722 23,243 15,431
Allowance for doubtful receivables (326) (698) (326)
13,396 22,545 15,105
Tax prepayments excluding corporate income tax
Value added tax 586 1,342 887
Other taxes 19 48 35
605 1,390 922
Amounts due from customers of contract works 6,499 12,437 3,948
Other short-term receivables
Short-term loans - 2,211 1,432
Interest receivables 71 432 200
Other short-term receivables 722 835 617
793 3,478 2,249
Prepayments for services
Prepayments for construction services 3,042 3,125 2,036
Prepaid insurance 335 227 275
Other prepaid expenses 277 385 319
3,654 3,737 2,630
Total trade and other receivables 24,947 43,587 24,854
incl. short-term loan receivables from related parties (Note 16) - 1,448 1,432
other short-term receivables and prepayments to related
parties (Note 16) 755 431 541
NOTE 7 INVENTORIES in thousand euros
31.03.2016 31.03.2015 31.12.2015
Materials 539 720 600
Work-in-progress 30,718 29,988 28,397
Finished goods 17,915 30,588 19,603
Goods for resale
Registered immovables purchased for resale 50,484 59,486 58,029
Other goods purchased for resale 783 832 790
51,267 60,318 58,819
Prepayments for inventories
Prepayments for real estate properties 1,086 1,086 1,086
Prepayments for other inventories 1,007 522 585
2,093 1,608 1,671
Total inventories 102,532 123,222 109,090
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
45
NOTE 8 LONG-TERM FINANCIAL ASSETS in thousand euros
31.03.2016 31.03.2015 31.12.2015
Investments joint ventures 254 23 284
Long-term loans 5,629 360 3,956
Long-term bank deposit 37 37 37
Long-term interest 209 7 7
Long-term receivables from customers of construction services 13,377 10,998 12,419
Total other long-term loans and receivables 19,506 11,425 16,703
incl. long-term loan receivables from related parties (Note 16) 4,085 360 2,456
other long-term receivables from related parties (Note 16) 209 7 7
NOTE 9 INVESTMENT PROPERTY in thousand euros
31.03.2016 31.03.2015 31.12.2015
Land 51 51 51
Right of superficies at carrying amount
Cost 29 29 29
Accumulated depreciation (11) (10) (10)
18 19 19
Buildings at carrying amount
Cost 5,250 5,245 5,245
Accumulated depreciation (1,010) (758) (944)
4,240 4,487 4,301
Total investment property 4,309 4,557 4,471
NOTE 10 PROPERTY, PLANT AND EQUIPMENT in thousand euros
31.03.2016 31.03.2015 31.12.2015
Land 824 824 824
Buildings at carrying amount
Cost 5,725 5,726 5,725
Accumulated depreciation (1,852) (1,674) (1,806)
3,873 4,052 3,919
Machinery and equipment at carrying amount
Cost 18,700 18,903 18,910
Accumulated depreciation (11,363) (10,365) (11,314)
7,337 8,538 7,596
Other fixtures at carrying amount
Cost 5,210 5,273 5,141
Accumulated depreciation (4,140) (4,094) (4,094)
1,070 1,179 1,047
Prepayments for property, plant and equipment 271 21 56
Total property, plant and equipment 13,375 14,614 13,442
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
46
NOTE 11 INTANGIBLE ASSETS in thousand euros
31.03.2016 31.03.2015 31.12.2015
Goodwill
Cost 968 891 891
Impairment (290) (201) (267)
678 690 624
Software at carrying amount
Cost 1 152 1,071 1 075
Accumulated depreciation (948) (854) (920)
204 217 155
Prepayments for intangible assets 66 - 100
Total intangible assets 948 907 879
NOTE 12 BORROWINGS in thousand euros
31.03.2016 31.03.2015 31.12.2015
Finance lease payables
Present value of lease payments 2,513 4,114 2,704
incl. current portion 837 1,557 912
non-current portion 1...4 years 1,676 2,557 1,792
Bank loans
Loan balance 16,610 21,814 19,403
incl. current portion 1,275 873 2,535
non-current portion 1...5 years 15,335 20,941 16,868
Loans from entities under common control
Loan balance 7,000 8,145 8,000
incl. current portion (Note 16) 1,000 8,145 1,000
non-current portion 1...5 years (Note 16) 6,000 - 7,000
Loans from management members - 102 -
incl. non-current portion 1...5 years (Note 16) - 102 -
Loans from other entities
Loan balance 31 941 1,078
incl. current portion 7 941 1,078
non-current portion 1...5 years 24 - -
Total loans
Loans balance 23,641 31,002 28,481
incl. current portion 2,282 9,959 4,613
non-current portion 1...5 years 21,359 21,043 23,868
Total borrowings 26,154 35,116 31,185
incl. current portion 3,119 11,516 5,525
non-current portion 1...5 years 23,035 23,600 25,660
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
47
NOTE 13 PAYABLES AND PREPAYMENTS in thousand euros
31.03.2016 31.03.2015 31.12.2015
Trade payables 17,499 25,681 16,325
Payables to employees 6,794 6,399 8,122
Tax liabilities, except for corporate income tax
Value added tax 645 477 2,005
Personal income tax 776 716 490
Social security tax 1,468 1,366 908
Unemployment insurance tax 72 80 56
Contributions to mandatory funded pension 66 65 45
Other taxes 121 119 96
3,148 2,823 3,600
Amounts due to customers for contract works 3,591 6,283 4,575
Other liabilities
Interest liabilities 20 139 143
Other liabilities 282 184 3,527
302 323 3,670
Prepayments received 7,026 21,423 6,974
Total payables and prepayments 38,360 62,932 43,266
incl. payables to related parties (Note 16) 220 5,466 3,273
NOTE 14 SHORT-TERM PROVISIONS in thousand euros
31.03.2016 31.03.2015 31.12.2015
Provision for warranty obligation for construction 2,407 2,070 2,378
Provision for costs of projects sold 1,953 1,112 2,120
Provision for onerous construction contracts 294 1,519 392
Provision for legal costs and claims filed 100 172 100
Other provisions 10 16 23
Total short-term provisions 4,764 4,889 5,013
NOTE 15 OTHER LONG-TERM PAYABLES in thousand euros
31.03.2016 31.03.2015 31.12.2015
Trade payables 989 1,160 1,159
Long-term Interest liabilities - 15 -
Other long-term liabilities - 3,267 -
Other long-term payables total 989 4,442 1,159
incl. other long-term payables to related parties (Note 16) - 3,261 -
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
48
NOTE 16 RELATED PARTY TRANSACTIONS in thousand euros
In compiling group the report, the following entities have been considered as related parties:
parent company AS Riverito;
shareholders of AS Riverito with significant influence over AS Merko Ehitus through AS Riverito;
other shareholders with significant influence;
other subsidiaries of AS Riverito, so-called ’entities controlled by the parent’;
associates and joint ventures;
key members of the management (supervisory and management board), their close relatives and entities under their
control or significant influence.
Significant influence is presumed to exist when the person has more than 20% of the voting power.
The parent of AS Merko Ehitus is AS Riverito. As at 31.03.2016, 31.03.2015 and 31.12.2015, AS Riverito owned 71,99% of the shares of
AS Merko Ehitus. The ultimate controlling party of the group is Mr Toomas Annus.
AS MERKO EHITUS SUBSIDIARIES AND JOINT VENTURES
Ownership and voting rights % Location Area of operation
31.03.2016 31.03.2015 31.12.2015
Subsidiaries
AS Merko Ehitus Eesti 100 100 100 Estonia, Tallinn Construction
Tallinna Teede AS 100 100 100 Estonia, Tallinn Road construction
OÜ Tevener - 100 - Estonia, Tallinn Mining
AS Vooremaa Teed 100 100 100 Estonia, Jõgeva Road construction
AS Merko Infra 100 100 100 Estonia, Tallinn Construction
AS Gustaf 100 100 100 Estonia, Pärnu Construction
AS Merko Tartu 100 66 100 Estonia, Tartu Construction
OÜ Raadi Kortermaja - 100 - Estonia, Tartu Real estate
OÜ Fort Ehitus 76 75 75 Estonia, Viimsi Construction
OÜ Mineraal 100 100 100 Estonia, Tallinn Mining
OÜ Heamaja 100 100 100 Estonia, Tallinn Real estate
OÜ Rannamõisa Kinnisvara 100 - 100 Estonia, Tallinn Real estate
UAB Merko Statyba 100 100 100 Lithuania, Vilnius Construction
UAB Statinių priežiūra ir
administravimas 100 100 100 Lithuania, Vilnius Construction
OÜ Merko Property 100 100 100 Estonia, Tallinn Real estate
UAB Balsiu mokyklos SPV 100 100 100 Lithuania, Vilnius Real estate
UAB Merko Bustas 100 100 100 Lithuania, Vilnius Real estate
UAB MN Projektas 100 100 100 Lithuania, Vilnius Real estate
UAB Jurininku aikštele 100 100 100 Lithuania, Vilnius Real estate
UAB Kražiu Projektas - 100 - Lithuania, Vilnius Real estate
UAB VPSP1 100 100 100 Lithuania, Vilnius Real estate
UAB Timana 100 100 100 Lithuania, Vilnius Real estate
UAB Rinktinės projektai 100 - - Lithuania, Vilnius Real estate
OÜ Jõgeva Haldus 100 100 100 Estonia, Tallinn Real estate
OÜ Metsailu 100 100 100 Estonia, Tallinn Real estate
OÜ Tähelinna Kinnisvara 100 100 100 Estonia, Tallinn Real estate
Väike-Paekalda OÜ 100 100 100 Estonia, Tallinn Real estate
Suur-Paekalda OÜ 100 100 100 Estonia, Tallinn Real estate
SIA Merko Investments 100 100 100 Latvia, Riga Holding
OÜ Merko Investments 100 100 100 Estonia, Tallinn Holding
SIA Merks 100 100 100 Latvia, Riga Construction
SIA SK Viesturdarzs 100 100 100 Latvia, Riga Real estate
SIA Merks Investicijas 100 100 100 Latvia, Riga Real estate
SIA Industrialas Parks 100 100 100 Latvia, Riga Real estate
SIA Elniko 100 100 100 Latvia, Riga Real estate
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
49
Ownership and voting rights % Location Area of operation
31.03.2016 31.03.2015 31.12.2015
SIA Ropažu Priedes 100 100 100 Latvia, Riga Real estate
PS Merko-Merks 100 100 100 Latvia, Riga Construction
SIA Zakusala Estates 75 75 75 Latvia, Riga Real estate
Merko Finland Oy 100 100 100 Finland, Helsinki Construction
Hartian Oy 75 - 75 Finland, Helsinki Real estate
As.Oy Helsingin Pestikuja 1 100 - 100 Finland, Helsinki Real estate
Lenko Stroi LLC 100 100 100 Russia, St. Petersburg Holding
Merko Finland Oy 100 - - Norway, Sofiemyr Holding
Hartian Oy 56 - - Norway, Sofiemyr Construction
Joint ventures
OÜ Unigate 50 50 50 Estonia, Tallinn Real estate
Poolkoksimäe Sulgemise OÜ 50 50 50 Estonia, Tallinn Construction
OÜ Kortermaja - 50 - Estonia, Tartu Real estate
Kivimäe 32 OÜ 50 50 50 Estonia, Tallinn Real estate
Kodusadam OÜ 50 50 50 Estonia, Tallinn Real estate
The 100% subsidiary in the Kingdom of Norway, Merko Investments AS (registry code 916 750 323) was founded in February 2016
and, on 17 February, entered into the register. Merko Investments AS, registered in Norway, is 100% subsidiary of AS Merko Ehitus.
The first contribution of NOK 30 thousand was made to the new subsidiary’s share capital on 3 February; the second contribution,
of NOK 4,700 thousand, was made on 3 March (totalling approximately EUR 502 thousand). This is a technical step aimed at
creating the legal platform for launching operations in Norway.
On 7 March 2016, Merko Investments AS, part of AS Merko Ehitus group, signed contracts with Norwegian companies SDV Holding
AS and Aucon AS to acquire 56% stake in Norwegian construction company Peritus Entreprenør AS. The total purchase price was
NOK 4,000 thousand (EUR 425 thousand). At the moment of purchase, the group developed an additional non-controlling stake in
the amount EUR 273 thousand. Peritus Entreprenør AS (www.peritus-entreprenor.no) is a Norwegian construction company,
offering general construction services, with the sales turnover of approximately 7 million euros in 2015. The former owners will
continue to participate in the daily management of the company and they keep their 44% stake. The aim of the acquisition is to
start offering construction services on Norwegian market.
On 7 March 2016, Merko Ehitus group subsidiary UAB Merko Bustas entered into an agreement with the company Venturecorp
Property Holdings Ltd for acquiring a 100% ownership in the Lithuanian real estate developer UAB Rinktinės projektai with a total
purchase price of EUR 2 thousand.
On 30 March 2016, AS Merko Ehitus’s 100% subsidiary AS Merko Ehitus Eesti made a non-monetary contribution into subsidiary OÜ
Fort Ehitus. The object of the non-monetary contribution was the ceding of claims arising from a loan agreement to OÜ Fort Ehitus
totalling EUR 1,880 thousand. Among other things, AS Merko Ehitus ceded claims worth EUR 1,429 thousand and the non-
controlling interest in the amount of EUR 451 thousand. After executing the transaction, AS Merko Ehitus Eesti’s stake in the
subsidiary OÜ Fort Ehitus increased by 1% percentage to 76%.
ACQUISITION OF SUBSIDIARY
in thousand euros
Peritus Entreprenør AS UAB Rinktinės projektai
Fair value Fair value
Cash 1,682 2
Short-term receivables 642 -
Inventories 5 -
Property, plant and equipment 47 -
Short-term liabilities 1 730 -
Long-term liabilities 25 -
Net assets 621 2
Non-controlling interest (273) -
Acquired ownership interest 56% 100%
Goodwill 77 -
Net assets aquired 425 2
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
50
Peritus Entreprenør AS UAB Rinktinės projektai
Fair value Fair value
Acquisition cost 425 2
Subsidiary’s cash and cash eqiuivalent on acquisition 1,368 2
Paid on acquisition (126) -
Cash flow from acquisition of subsidiary 1,242 2
Net profit for the period (51) -
Comprehensive income for the period (51) -
incl. net profit attributable to equity holders of the parent (29) -
net profit attributable to non-controlling interest (22) -
GOODS AND SERVICES
in thousand euros
2016 3 months 2015 3 months 2015 12 months
Provided services and goods sold
Parent company 4 2 12
Joint ventures 428 102 530
Entities under common control 2,901 - 49
Members of the management 80 - 1,837
Total services provided and goods sold 3,413 104 2,428
Interest income
Joint ventures 65 31 171
Purchased services and goods
Parent company 23 23 90
Entities under common control 36 31 125
Other related parties - - 6
Total purchased services and goods 59 54 221
Interest expense
Entities under common control 46 30 201
Members of the management - 1 2
Total interest expense 46 31 203
BALANCES WITH RELATED PARTIES
in thousand euros
31.03.2016 31.03.2015 31.12.2015
Receivables from related parties
Loans granted (Notes 6, 8)
Joint ventures 4,085 1,808 3,888
Receivables and prepayments (Note 6)
Parent company 4 3 4
Joint ventures 426 428 536
Entities under common control 270 - 1
Other related parties 55 - -
Total receivables and prepayments 755 431 541
Other long-term receivables (Note 8)
Joint ventures 209 7 7
Total receivables from related parties 5,049 2,246 4,436
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
51
31.03.2016 31.03.2015 31.12.2015
Payables to related parties
Loans received (Note 12)
Entities under common control 1,000 8,145 1,000
Other related parties - 102 -
Total loans received 1,000 8,247 1,000
Payables and prepayments (Note 13)
Parent company 9 9 9
Entities under common control 211 4,097 3,264
Members of the management - 1,360 -
Other related parties - - 618
Total payables and prepayments 220 5,466 3,891
Other long-term payables (Note 12)
Entities under common control 6,000 3,261 7,000
Total payables to related parties 7,220 16,974 11,891
TRANSACTIONS INVOLVING RELATED PARTIES (ADDITIONAL INFORMATION)
On 17 February 2016, AS Merko Ehitus’s 100% subsidiary SIA Merks realized immovable properties located at Dikmana 8, Dikmana
10 and Grostonas 15 in Riga to 100% subsidiaries SIA SBC 08, SIA SBC 10 and SIA SBC 15 of a related party E.L.L. Kinnisvara AS at the
sale price in the total amount of EUR 2,600 thousand.
REMUNERATION OF THE MEMBERS OF THE SUPERVISORY AND MANAGEMENT BOARDS
The gross remuneration to members of the Supervisory Board and Management Board of AS Merko Ehitus group and the members
of the Management Board of major subsidiaries for the 3 months of 2016 was EUR 465 thousand (3 months of 2015: EUR 491
thousand; 12 months of 2015: EUR 2,191 thousand).
TERMINATION BENEFITS OF MEMBERS OF THE SUPERVISORY AND MANAGEMENT BOARDS
Authorization agreements have been entered into with the Supervisory Board members according to whom no termination
benefits are paid to them upon termination of the contract. In the 3 months of 2016, the Management Board members of major
subsidiaries received EUR 10 thousand in compensation (3 months of 2015: EUR 14 thousand; 12 months of 2015: EUR 18 thousand).
MEMBERS OF THE SUPERVISORY AND MANAGEMENT BOARD
Track record and photographs of the members of the Supervisory Board can be found on AS Merko Ehitus website at:
group.merko.ee.
Shares held by members of the Supervisory Board of AS Merko Ehitus as at 31.03.2016:
NO OF SHARES % OF SHARES
Toomas Annus (AS Riverito) Chairman of the Supervisory Board 8,322,914 47.02%
Indrek Neivelt (OÜ Trust IN) Member of the Supervisory Board 31,635 0.18%
Olari Taal (OÜ Eggera) Member of the Supervisory Board 2,500 0.01%
Teet Roopalu Member of the Supervisory Board - 0.00%
8,357,049 47.21%
The Management Board of the holding company AS Merko Ehitus has two members: Andres Trink and Tõnu Toomik.
Shares held by members of the Management Board of AS Merko Ehitus as at 31.03.2016:
NO OF SHARES % OF SHARES
Andres Trink Chairman of the Management Board 300 0.00%
Tõnu Toomik (AS Riverito) Member of the Management Board 1,607,185 9.08%
1,607,485 9.08%
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
52
NOTE 17 CONTINGENT LIABILITIES in thousand euros
The group has purchased the following guarantees from financial institutions to guarantee the group’s obligations to third parties.
These amounts represent the maximum right of claim by third persons against the group in case the group is unable to meet its
contractual obligations. Management estimates that additional expenses related to these guarantees are unlikely.
31.03.2016 31.03.2015 31.12.2015
Performance period’s warranty to the customer 11,036 17,284 9,174
Tender warranty 776 824 745
Guarantee warranty period 22,300 18,696 23,988
Prepayment guarantee 1,721 8,714 2,336
Payment guarantee 30,500 278 30,500
Contracts of surety 1,288 338 654
Letter of credit 20 927 2,000
Total contingent liabilities 67,641 47,061 69,397
The "Payment guarantee" entry includes a payment guarantee for the benefit of a financial institution, issued within the
framework of a contract for construction entered into in the fourth quarter of 2015, in order to secure the customer's contractual
payment obligations in the total amount of up to EUR 30,500 thousand. The realisation of the payment guarantee is not considered
likely by the group. In order to secure the payment guarantee, a second-rank mortgage on the registered immovable
accommodating the building to be constructed within the framework of the contract for construction has been established for the
benefit of the group in the total amount of EUR 8,500 thousand.
Performance period’s warranty to the customer – warranty provider guarantees to the customer that the contractor’s
obligations arising from construction contract will be adequately completed.
Tender warranty – warranty provider guarantees to the customer arranging the tender process that the tenderer will sign a
contract as per tender conditions.
Guarantee for warranty period – warranty provider guarantees to the customer that the construction defects discovered during
the warranty period will be eliminated.
Prepayment guarantee – warranty provider guarantees to the customer that advances will be reimbursed, if contractor fails to
deliver goods or services agreed.
Payment guarantee – guarantor guarantees repayments of the customer’s/developer’s loan and/or warranty provider
guarantees to the customer payment for goods or services.
Letter of credit – A letter of credit is the obligation of the buyer (i.e. the bank opening the letter of credit) to pay the seller (i.e. the
receiver of the letter of credit) the amount of the letter of credit if the seller fulfils and presents documentation to the bank
regarding the fulfilment of the conditions fixed with the letter of credit.
AS MERKO EHITUS CONSOLIDATED INTERIM REPORT
53
MANAGEMENT BOARD'S CONFIRMATION TO THE CONSOLIDATED
INTERIM REPORT
The Management Board of AS Merko Ehitus has prepared the consolidated interim financial statements for the 3 months of 2016,
which are set out on pages 5-52.
The Management Board confirms that to the best of its knowledge:
- The accounting methods used to prepare the interim financial statements are in conformity with the International Financial
Reporting Standards as adopted by the European Union;
- the financial statements give a true and fair view of the Group’s financial position and the results of its operations and cash
flows;
- the parent company and the group companies are going concerns.
Andres Trink Chairman of the Management Board 05.05.2016
Tõnu Toomik Member of the Management Board 05.05.2016